Wednesday, February 29, 2012

Reflecting on the Comparative Wealth of Political Leaders in China and the U.S.

British philosopher and statesman Edmund Burke said that reading without reflecting is like eating without digesting. Let's read and reflect on the comparative wealth of U.S. and Chinese politicians and what it suggests about our American future.

Are China's Politicians the Richest in the World? provides a most interesting contrast between the wealth of Chinese and American politicians. Here's what it has to say:

"Congress has come under increasing attack for its wealth. But U.S. Congresspeople are poor, compared with China’s political leaders.

According to the Hurun Report, as cited by Bloomberg, the 70 richest delegates in China’s National People’s Congress have a combined net worth of 565.8 billion yuan or $89.8 billion. That’s more than 10 times the combined net worths of all the members of Congress, the Supreme Court and the President. (Their collective riches are only $7.5 billion.) . . . .

For those who think this growing wealth reflects a rising tide that’s lifting all Chinese boats, consider this: Per capita annual income in China is still about $2,425. . . .

The question is whether this skyrocketing “princeling” wealth will touch off social unrest or real protests. A kind of “Occupy the Great Hall” movement.

Many Western China watchers point out that as long as the overall economy keeps growing and generating jobs, China won’t erupt in class warfare. What’s more, government officials are currently making a huge show of cracking down on corruption, and they maintain tight control over communications and the media.

Yet China seems to support an old adage: In the U.S. people get rich to get into politics. In other countries, they get into politics to get rich."

Reflecting on the above "old adage" about the U.S., it's indeed true that George Washington, Ben Franklin and other founding fathers' wealth preceded service to their country. They certainly didn't enhance their personal finances by entering the political sphere. They were public servants performing public service. Today career politicians have taken their place, and that's too bad.

Somewhere along the way, American leaders began to acquire their wealth after entering public service. So things have changed in the U.S., and we have now begun to follow other countries. That is, political power now often represents, among other things, the way to achieve personal wealth.

As a result, now we're becoming a follower of countries like China where the political class rules.

You say that's not possible. Well, let's take the recent occupants of the U.S. presidency as an example. My guess is that a big part of the wealth of the Bush family, and for sure the Clintons and Obamas, will have come from their "public service" careers. And that they will acquire a great deal of wealth along the way.

But it's worse that that. Much worse, in fact.

Today a fat cat from the private sector would be crazy to enter the political process as an office seeker. Who needs it? In fact, it's generally a huge negative when people with wealth from private sector success decide to run for elected office. Meg Whitman of eBay recently ran for Governor of California and lost to career politician Jerry Brown. Mitt Romney is always having to defend his private sector success and is unlikely to be elected as president in 2012.

Somehow successful private sector players who try to become public servants are now seen as the bad guys while the career politicians opposing them are viewed as the good guys. Reflect on that one, if you will.

In addition, the fat cats from the private sector are blasted for not playing by the rules and paying their "fair share" by those career politicians who made the rules. Go figure.

In the end, the Clintons and Obamas will end up being quite rich as a result of their political achievements and will rake in lots of money writing books and making speeches after their days of "public service" have ended.

So We the People conclude that Romney is a bad guy fat cat who doesn't pay his fair share of taxes, and Obama is a good guy fighting on behalf of the middle class. Reflect on that one, too.

Summing Up

So upon reflection, I say what's the big deal about communist China having lots of its politicians having achieved great wealth as a result of being Chinese political leaders? We're headed that way, too.

The Chinese political leaders are just more experienced at this game. That's probably why they have much more per capita wealth than do our U.S politicians. It ain't over 'til it's over, so maybe we should wait and see how much U.S. public servants like the Clintons and Obamas have at the end of their personal road to riches. In fact, it very well could end up a horse race.

But upon reflection, does it really matter that politics pays so well? I think it does, and that there's something very wrong about all this. But that's just my opinion.

All that said, there remains one huge difference between the Chinese political process and ours. Unlike the Chinese, We the People have the power to change things in America if we so choose to do so. But first, we must decide to do just that.

Maybe acquiring wealth through hard work in the private sector before entering politics shouldn't be seen as such a bad thing in the U.S. today. I really wonder why it seems to be a disqualifier.

I'll reflect on that one. You may wish to as well.

Thanks. Bob.

Tuesday, February 28, 2012

Free Markets Should Set Gasoline Prices

Gasoline prices are rapidly moving toward the $4 per gallon level. And perhaps much higher.

What should be done about it, if anything? The politicians are getting excited about all this, and want to do something to "help" the cause, so it's time to play the "we're from the government and here to help" game.

Here's my answer to any help which may be offered by the government. Stay out of the market's way.

Let's simply allow the marketplace to set gasoline and related pricing. That's always been the best way, and it will be this time as well. Even moreso in an election year.

What's Right With Gas Prices is subtitled 'History Lesson: The price mechanism will keep our fuel tanks from running dry.' The essence of the editorial's argument is as follows:

"Pundits, at times like these, insist America must finally get an energy policy. But we have one. It's called the price mechanism, and unless drastically interfered with, it has always given us a price at which we can buy all the gasoline we want.

Let's look at today's price. At $3.65 a gallon, gasoline has reached a price, in real, inflation-adjusted terms, it has reached only a few times in history. It reached a similar price in the last year of World War I, during the global trade breakdown of the '30s, after the Iranian Revolution in 1979, and amid the extended instabilities that began with the Arab Spring, continued with the U.S. withdrawal from Iraq, and are reaching a pitch with today's war talk over Iran's nukes. . . .

Reserves of fossil energy are distributed widely around the world; the Mideast today plays its central role (as we once did) only because its production costs are the lowest and thus, in a rough sense, determine what everyone else's oil is worth. Instead, the important question is what can we do?

Ironically, the best therapy is a higher oil price. It makes it profitable to bring into production more costly resources around the world. The rise in recent years to $100-plus a barrel is a godsend. Peak oil theorists are being refuted; so are greenies who imagined a towering oil price would usher in a carbon-free future. The opposite is seen to be true. Oil sands, shale hydrocarbons and even biofuels have been made profitable with existing technology, and of course technology can be counted on to advance.

A higher price not only elicits the new supplies to satisfy Indian and Chinese motorists; it helps to distribute production more broadly around the globe and lets the world be less dependent on cheap Mideast oil.

Mr. Obama this week mocked Republicans who say, "Drill, baby, drill." But it's only right that America should produce, not just consume, the world's energy. It would be foolish to deny ourselves a share of the jobs and profits that flow from producing what America, realistically, will continue to consume in great gobs for decades to come despite any Obama fantasies about alternative energy. . . .

One last thing: In the past 100 years, the real price of gasoline, in current dollars, has spent almost all its time between $2 and $4. So today's price is hardly the end of the world."

My Take is Straightforward and Simple

President Obama is wrong about many things, but his approach to America's energy is perhaps where he's most wrong. His stance seems to be nothing other than political gamesmanship, pure and simple. That said, my guess is that his energy "game" didn't contemplate the surprise of rapidly increasing gasoline prices in an election year. Game on.

The fact is this--we don't regulate or in any way control world energy prices. Neither are we energy independent. We import lots of oil and pay global prices for that oil.

Accordingly, every increase in petroleum that we produce can be sold, and it can be sold at the global market price. If that market price increases further, we'll get the added benefit of a physical volume increase at a higher price for each barrel sold.

That's a double whammy of the good kind for America in lots of ways. More barrels produced and sold at higher prices equate to higher revenues.

And we'll have more high paying jobs, higher tax receipts and the accompanying need to buy less oil from unfriendly nations. What's not to like about that?

Of course, we'd all like lower global prices, but we don't get to set them. They will be what they will be. In any event, we want to get as much of that revenue as possible for the good guys, meaning North American producers, distributors, pipeline builders, workers and American citizens.

With respect to bringing about lower gas prices, there's only one viable long term solution--increase the supply and reduce the amount consumed relative thereto.

Higher prices are the single best way to increase the world's oil supply and reduce our dependence on the bad guys. And that very much includes raising the U.S. supply.

It's all so simple.

Let's just get the government and vote seeking politicians out of the way and let supply and demand establish the price of gasoline.

And if global prices continue to increase, behaviors will change and there will be less oil consumption. This in turn will bring about lower prices.

So let's just start doing the right thing--domestically consuming less while supplying more of the world's petroleum needs. High prices can make both those good things happen.

Along the path to American energy independence, allowing more offshore, onshore and Alaska drilling while building the XL pipeline would be a good beginning. Doing those things would not only result in a much greater supply of U.S. energy, but making our intentions known to the rest of the world would cause energy prices to come down dramatically even before we increase our U.S. energy supply.

Of course, more American energy supplied would enhance our nation's overall security as well, as lots of unfriendly sovereigns with plentiful oil, including Iran and Venezuela, are hostile to American interests.

But maybe the worst thing President Obama could do would be to take oil from our Strategic Petroleum Reserve in order to achieve a temporary lower gasoline price.

Very simply, what we must do is allow the price mechanism to work. By so doing, we will opt to use less oil, produce more oil and move further along the path to energy independence.

And achieving that will result in our energy needs not being at the mercy of many dangerous and rogue nations in the future.

Thanks. Bob.

Monday, February 27, 2012

State and City Financial Woes, Including Jobs, Public Services and Public Sector Pensions

Budget Woes Prompt Erosion of Public Jobs, With a Heavy Toll in Silicon Valley tells the story of financially strapped San Jose, California.

San Jose is illustrative of what's happening in numerous state and local governments across America:

"The nation has lost 668,000 state and local government jobs since the recession hit — more than in any modern downturn . . . . {I}n cities and states around the country, the loss of those jobs has made it harder to provide services and has upended the lives of thousands of workers who had thought their government jobs were safe.

It is not just faded industrial cities that are struggling to retain their workers. San Jose, a growing city of nearly one million in the heart of Silicon Valley that is now the nation’s 10th biggest, has shed 1,592 jobs — more than a fifth of its employees — over the last four years as falling tax revenues, rising pension costs and dwindling state aid have all taken their tolls on the city and its workers. . . . the city’s tax collections this year are projected to remain below where they were five years ago — and California law makes it hard for cities to raise taxes, since they must win voter approval first. Pension costs now consume more than a fifth of the city’s general fund budget, officials said, and have risen to $245 million this year from $73 million a decade ago.

“You’ve got this double whammy for local government of the retirement costs escalating and the crash of ’08, the recession, knocking revenues down at the same time,” Mayor Chuck Reed, a Democrat, said in an interview in his office in the city’s new 18-story Richard Meier-designed City Hall, which was built in better times by his predecessors.

The city government’s employee head count has shrunk to 5,400 from 7,418 a decade ago, when it had fewer residents. Branch libraries are open only four days a week. And the city recently won agreements from its unions to cut compensation for all of its employees by at least 10 percent.

Now Mr. Reed is taking aim at pension costs, which rose after the benefits were improved over the last decade, with police officers and firefighters able to retire after 30 years with pensions worth 90 percent of their salaries. He supports a ballot measure this June that would require workers to go into far less lucrative retirement plans, or to contribute up to 25 percent of their salaries to keep their current benefits. “Every dollar the city pays for retirement costs is a dollar we can’t spend on services for our residents,” he said in his annual State of the City speech this month.

Union members picketed the speech. They have accused the city of exaggerating the future costs of pensions to build support for the measure. Jim C. Unland, the president of the San Jose Police Officers’ Association, said that the police were willing to negotiate on retirement costs, but that the mayor’s proposals went too far.

Yolanda Cruz, a library network engineer and the president of the city’s Municipal Employees’ Federation, pointed out that city workers would not get Social Security, and that the average pension for nonuniformed workers was $36,000 a year. She said a city-commissioned poll had found a growing willingness to raise taxes."

At least the taxpayers will have their say in the matter. My guess is that they'll say no to higher taxes to pay for the rich pensions of public sector workers. Then the employees themselves can decide to contribute more or agree to reduced retirement benefits. They'll be free to choose, after the taxpayers have first spoken. Sounds right to me.

In Alabama, a County That Fell Off the Financial Cliff relates the tale of bankrupt Jefferson County (Birmingham), Alabama. Here's what the article says in part:

"Officials here have only begun to grapple with the implications of life under Chapter 9 of the federal bankruptcy code, a municipal form of debt adjustment, rather than reorganization or liquidation. Until now, the most famous example was Orange County, Calif., which filed for Chapter 9 in 1994, after risky investments went horribly wrong. Many local governments are struggling to pay their bills these days, but hardly any have filed for bankruptcy. Notable exceptions include Harrisburg, the capital of Pennsylvania, Vallejo, Calif., and Central Falls, R.I.

“This is really a journey without a road map,” said John S. Young, the civil engineer who was appointed by an Alabama court to figure out how to fix Jefferson County’s sewer system. Today he is that project’s official receiver in name only: a federal bankruptcy court has suspended his powers, ruling that the federal bankruptcy law trumps state laws that protect bondholders.

Ordinary citizens can’t do much at this point. Jefferson County has even canceled municipal elections scheduled for this August. It seems that there’s no money for voting booths, either."

Yes, many of our American cities and states are in unfamiliar territory today. Promises made in the past are unable to be kept without huge tax increases or severely reduced public sector jobs and public services.

In many situations, public services have already been curtailed, and it's now obvious that public sector pensions were frequently underfunded by huge amounts. Meanwhile, taxpayers rightfully are reluctant to endorse the prior under-the-radar pension plan promises of their elected representatives.

And while talking a good game in general terms, public sector union leaders, like the politicians, also seem unable or unwilling to come to grips with these ugly realities.

My view is that we're probably in the second inning of the first game of a long doubleheader.

So let's be sure to stay tuned as this stuff gets sorted out in lots of cities, counties and states. It will because it has to.

You see, it's not just the federal government in need of severe belt tightening and a serious ongoing diet. It's very much the public sector as a whole.

Thanks. Bob.

Sunday, February 26, 2012

Time, Taxes and American Freedoms

Basic economics is about the choices we make in relation to the scarce resources available from which we can choose.

Earnings represent the value others place on what we do. The amount of time we spend doing what we do creating that value is often, but not always, an important factor when determining value.

Government tax receipts frequently represent how much time has been spent working to pay for the government we've chosen to support. The more government services we demand, the more time we need to spend paying for those services, and the fewer government services we require, the less time we need to spend paying for those desired government services. At least that's the way it should work.

Accordingly, the time we are required to spend working to earn the taxes we pay can only be properly determined after we have chosen the level and value of the government services we've chosen. Of course, that's not even remotely close to how our "public servants" do things today.

Instead the politicians debate how much the relatively few fat cats should pay. And they all agree not to even mention the need to either reduce expenditures or tax the non-fat cats more, since the non-fat cats represent the bulk of the voters.

And since nobody, fat cats or non-fat cats, likes to pay taxes, and since all politicians want to get as many votes as possible, our nation's financial problems continue to worsen.

In any event, whatever the fat cats are required to pay won't be nearly enough to offset the expenditures made by our wasteful vote soliciting politicians. There won't even be an honest attempt to equate government spending to tax receipts.

As a result, the tax debate is pretty much a road leading to nowhere, except for votes, since no serious attempt is made to pay for the cost of government.

And there is zero doubt that the government we're being provided would not be the government we'd choose if we were to pay for it in full. So the politicians just pretend to be serious, and we the people wink and let things be. But things keep getting worse, and the day of reckoning comes ever closer.

But that's a problem for future generations and not for us. Right? This is all quite asinine.

So why don't we first decide what government services we want to purchase, and how much of our individual freedoms, including time spent, we're willing to forfeit to pay for the government of our choice?

In other words, taxes are all about the time taken from us to pay for government services rendered. We exchange our time, aka earnings, for the government services we select. At least that's how it should work.

Now let's switch gears and let our American style optimism show through.

The book "Abundance: The Future Is Better Than You Think" by Diamandis and Kotler is reviewed in Defying the Doomsayers.

When predicting the future, here's the book's prescription, "The best way to predict the future is to create it yourself." To which I reply, "Well said!"

Stated another way, in a free society, we can decide what to do with our time. That means we're in charge of how much or little knowledge we acquire, as well as how much our talent is developed, what entrepreneurial efforts we choose to undertake, what we learn from our numerous experiences, successes and failures, and so on.

The book highlights the staggering pace of change unfolding throughout the world in terms of information. And the authors conclude that the fact that information and knowledge are expanding exponentially is a very good thing for the future of humankind.

Consider this excerpt about the proliferation of information:

"If every image made and every word written from the earliest stirring of civilization to the year 2003 were converted to digital information, the total would come to five exabytes. An exabyte is one quintillion bytes, or one billion gigabytes—or just think of it as the number one followed by 18 zeros. That's a lot of digital data, but it's nothing compared with what happened from 2003 through 2010: We created five exabytes of digital information every two days. Get ready for what's coming: By next year, we'll be producing five exabytes every 10 minutes. How much information is that? The total for 2010 of 912 exabytes is the equivalent of 18 times the amount of information contained in all the books ever written. The world is not just changing, and the change is not just accelerating; the rate of the acceleration of change is itself accelerating."

What's it all potentially mean to us? And why is it such a good thing? Let's talk income inequality, poverty and the future:

"Given all the talk nowadays about income inequality, the authors' discussion of poverty is especially instructive. The number of people in the world living in absolute poverty has fallen by more than half since the 1950s. At the current rate of decline it will reach zero by around 2035. Groceries today cost 13 times less than 150 years ago in inflation-adjusted dollars. In short, the standard of living has improved: 95% of Americans now living below the poverty line have not only electricity and running water but also Internet access, a refrigerator and a television—luxuries that Andrew Carnegie's millions couldn't have bought at any price a century ago."

As our basic material needs are sated, freedom takes over on humankind's list of wants. Consider what's happening in China today.

Plan B for China's Wealthy: Moving to the US., Europe relates the story of people's yearning for freedom. Here's an example from Beijing:

"This time last year, Shi Kang considered himself a happy man.

Writing 15 novels had made him a millionaire. He owned a luxury apartment and a new silver Mercedes. He was so content with his carefree life in Beijing that he never even traveled overseas.

Today, a year later, Mr. Shi is considering emigrating to the U.S. (and offers his reasons) "Things are real there, . . . Here you don't know what to believe. . . . I like China a lot. But if I have kids, I wouldn't necessarily want them to live in China."

With a fortune of at least $1.6 million, Mr. Shi is part of the wealthy elite that benefited most from the Communist Party's brand of capitalism. He is riding the crest of arguably the biggest economic expansion in history.

And yet, while the party touts the economic success of the "Chinese model," many of its poster children are heading for the exits. They are in search of things money can't buy in China: Cleaner air, safer food, better education for their children. Some also express concern about government corruption and the safety of their assets.

The movement represents the fraying of an unwritten social contract between the Communist Party and China's citizens that has held the nation together through wrenching changes since Deng Xiaoping launched market reforms in 1978: The rulers deliver economic growth; the ruled make few political demands. The underlying message seems to be that after three decades of rising prosperity, wealthier Chinese are either looking beyond their economic gains, or taking them for granted, and now crave improvements in their quality of life."

Summing Up

The attainment of economic growth and personal security create a desire for more individual freedoms. That's always the case.

After the basic needs of security, food, shelter and clothing are met, quality of life considerations become of increasingly greater importance.

In that regard, the message is straightforward and simple.

We each have a limited amount of time to pursue our goals. Those goals will include, but not be limited to, education, family, financial security, hobbies, knowledge, community service and happiness.

Time is scarce. Accordingly, time spent working to pay taxes results in less freedom.

That's because taxes subtract from individual freedom and choice to do other things with our time and/or money.

Therefore, choosing more government equates to choosing less freedom.

On the other hand, having more freedom affords us the opportunity to gain more knowledge.

Increased knowledge contributes to our material prosperity and an improved quality of life, leading to even greater freedom.

Government should be restricted to as small a role in our lives as possible.

That way we can each choose how to spend our time and energy, thereby living life to its fullest.

Thanks. Bob.

Saturday, February 25, 2012

Current vs. Delayed Consumption .... Marshmallows and Free vs. Paid Lunches

Today we'll consider the negative effects of failing the marshmallow test, or what economists commonly refer to as time inconsistency.

It says a lot about us as individuals and as a society when we not only want what we want but demand that we get it now, and frequently demand or allow government to provide it to us for free or almost free.

We tend to neglect the simple and inescapable fact that government doesn't generate anything of economic substance. If B doesn't contribute or pay high enough taxes to pay for the benefits he later receives from government, after deducting government's operating expenses, government acquires the rest of what B receives in benefits by taking some of what A has produced and then, after deducting government's cut, redistributes the remainder to B.

As an example, we receive from the government ~$3 for each $1 we contribute to Medicare during our working years. That $2 doesn't come from government. Instead it comes from A or future taxes on descendants of B or A.

In a broader sense, the tendency to fail the marshmallow or time inconsistency test reveals much about our sick political system and how it considers only "today" when making decisions. Sadly, what will likely happen tomorrow as a result of what we do today frequently doesn't factor into politics.

That is, tomorrow only becomes relevant to politicians when the inevitable crisis resulting from "today" thinking and acting takes center stage, and delay is no longer possible. Unfortunately, by then tomorrow has become today. As is the case now, at least in my opinion.

That's because we've run out of time to leisurely address and act on our nation's financial problems. And if we're not yet at the financial crisis stage in the U.S. and world at large, we're certainly getting close. Real close.

Obama's Budget Flunks the Marshmallow Test understates the case by observing that individuals and countries who aren't able or willing to defer gratification tend to be less successful than their counterparts.

Here's what the editorial says, and it's worth quoting at some length:

"The president's proposed new budget has three noteworthy characteristics: continuing unfunded entitlements to the middle class, runaway deficits to be repaid in the undefined future, and immense tax increases on the entrepreneurial class. Many commentators have complained about the damage this budget would do to our national prosperity. Less has been said about the effect it will have on something far more important: our national character.

There is a tremendous amount of research on the links among success, character and the ability to sacrifice. It all reaches the same conclusion: People who cannot defer current gratification tend to fail, and sacrifice itself is part of entrepreneurial success.

In one famous study from 1972, Stanford psychologist Walter Mischel concocted an ingenious experiment involving young children and a bag of marshmallows. He put a marshmallow on the table and told each child that if he (or she) could wait 15 minutes to eat it, he would get a second one as a reward.

About two-thirds of the kids failed the experiment. Some gave in immediately and gobbled up the marshmallow; videotape shows others in agony, trying to discipline themselves—some even banging their little heads on the table.

But the most interesting results from that study came years later. Researchers followed up on the children to see how their lives were turning out. The kids who didn't take the marshmallow had average SAT scores 210 points higher than the kids who ate it immediately. They were less likely to drop out of college, made far more money, were less likely to go to jail, and suffered from fewer drug and alcohol problems.

But the evidence goes beyond a finding that people who can defer gratification tend to turn out well in general.

When we hear about successful entrepreneurs, it is always as if they had the Midas touch. . . . In real life, that's not how it works. . . . the average entrepreneur fails about four times before succeeding. . . .

Why this emphasis on the struggle? Entrepreneurs know that when they sacrifice, they are learning and improving, exactly what they need to do to earn success through their merits. Every sacrifice and deferred gratification makes them wiser and better, showing them that they're not getting anything free. . . .

What does all this have to do with public policy? The present administration believes we should be able to get our country fiscally back on track without the vast majority of Americans having to accept less from government. Year after year, no entitlement recipient is asked to give up benefits—even benefits well above a basic safety net.

Bailouts for homeowners, auto companies and financial firms have protected many from the consequences of poor decisions. And even as we run up unprecedented debt, public-sector workers continue to receive pay and benefits that exceed those of their private-sector counterparts.

The expanding welfare state exists, in no small part, to shove marshmallows into our collective mouth. The government . . . is aggressively moving us away from the national entrepreneurial ethos, teaching dependency and changing our relationship to the state.

This is not conservative dogma. Look at Greece. . . .

Is this where we want to go? If not, then we had better recognize that the right path to fiscal consolidation is not to find creative new ways to push debt into the future or vacuum more taxes out of the wealthy. It is to cut spending and reform entitlements right now. It means actual sacrifice—and that is not a bad thing."

Summing Up

Recently we discussed the fact that production has to precede consumption. In other words, that there is no such thing as a free lunch, and that government programs which create demand unaccompanied by production are harmful to our nation's well being.

Today we've simply added the marshmallow or time inconsistency piece to the conversation.

If on average we believe that we've earned all the government benefits we receive, even though we're receiving much more than we contributed, we're kidding ourselves. Somebody will have to pay for what we didn't fund ourselves. And that somebody will be either someone paying higher taxes today or somebody else paying higher taxes "tomorrow."

As long as we genuinely believe, or pretend to believe, that the government can do something for us financially that we haven't done for ourselves, the politicians will pander to that actual or pretend belief. We receive a free lunch, and they get to stay in office. Of course, the free lunch part is untrue, even if we all pretend otherwise.

Only when we stop practicing insanity (doing the same thing over and over and expecting a different result) will politicians begin to act responsibly and appropriately.

At that point, but not before, we will be able to function as free people in a free society, behaving in an adult and self reliant manner. And when we do that, we'll very much have the ability to take care of those truly in need as we'll again have the necessary resources to give a "hand up."

Perhaps Pogo said it best. We are our own worst enemy.

We have to stop believing or pretending, as the case may be, that we can consume that which we don't produce, and that applies to paying for our own lunch, too.

Lunch is never free, and free people will never wish for it to be free.

That's never been the American way, and it never will be.

Thanks. Bob.

Friday, February 24, 2012

The Truth about Consumption, Production, Government "Knows Best" Price Fixing and Free Markets

British philosopher and economist John Stuart Mill said this in 1844 (Notable & Quotable):

"From John Stuart Mill, "Of the Influence of Consumption on Production" (1844):

Among the [economic] mistakes which were most pernicious in their direct consequences . . . was the immense importance attached to consumption. The great end of legislation in matters of national wealth, according to the prevalent opinion, was to create consumers. . . . It is not necessary, in the present state of the science, to contest this doctrine in the most flagrantly absurd of its forms or of its applications. The utility of a large government expenditure, for the purpose of encouraging industry, is no longer maintained.

Taxes are not now esteemed to be "like the dews of heaven, which return again in prolific showers." It is no longer supposed that you benefit the producer by taking his money, provided you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasonings of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take from the pockets of the people to spend on your own pleasures, the richer they grow; that the man who steals money out of a shop, provided he expends it all again at the same shop, is a benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman's fortune. . . .

What a country wants to make it richer, is never consumption, but production."

In simple terms, Mills demonstrated the idiocy of emphasizing consumption and not production. Why are government initiatives to create additional demand almost always a wrongheaded approach?

Well, for one reason, because we can't consume more than we produce. It's not possible. Or maybe because there is no such thing as a free or beneficial government price fixed approach without causing unseen, unintended and harmful consequences elsewhere.

In any event, Mill's comments caused me to reflect on how this applies so directly to our current financial mess. We've created lots of demand without making any serious effort to pay for it through increased private sector production. It's as if demand creation will pay for itself. If only that were so! But it's not and never has been, as Mill said in 1844.

For a peek into our nation's self-made financial debacle, let's look briefly at the demand-production-pricing problems associated with the four huge government expenditure programs of Medicare, Medicaid, Social Security and public education.

If we bring these four programs under control, our nation will be well on the road to a sustainable state of financial stability. Until then, however, it's all happy talk.

Demand is strong when prices are weak, all other things being equal. And when prices are fixed by government at a free or heavily subsidized level, demand is especially strong. So stimulating demand is not a problem in a non-market based segment of the economy. It's the lack of supply at a free market set competitive price that's the killer. And that's exactly what the government does when it interferes with the free market's price discovery mechanism

You see, new demand needs to be accompanied by a spike in production, productivity, prices, or all three.

1- Medicare and the Affordable Care Act, aka ObamaCare, both fix prices as set by government officials. Demand is generated by "consumers" who don't freely choose what or whether to buy based on pricing set by the suppliers, as is the case with market based pricing and services.

The supplier doctors are represented by the nation's strongest union (American Medical Association) and operate under a fee for services pricing structure. The more services and tests performed, the more the doctors are paid. So doctors are happy to produce more services as demand is created. They in fact often are the originators of that demand for tests and such. All the consumer contributes is his time and body. Government pays the doctors supplying the services.

2- Medicaid is largely about providing elderly nursing home patient care. Medicaid payments are about 50% paid for by the federal government and about 50% paid for by state governments. As with Medicare, prices are fixed by government, and government pays the bill.

3- Social Security pays benefits to recipients according to a formula adopted by government from time to time. Like Medicare and Medicaid, Social Security payments are not dependent on the government having specific funds available to make those payments.

In all three cases (Medicare/ObamaCare, Medicaid and Social Security), the government establishes who contributes what amounts, if anything, and what benefits and payments they and their providers will in turn receive, regardless of whether sufficient funds are available to make the required payments.

4- Public education is financed by local property taxes, individual state grants and federal funds as well. It's a free lunch proposition for those students who attend the public schools.

What's all this mean with respect to the relationship between demand and supply, or consumption and production, or deficits and taxes? Asked another way, what happens when free markets don't set prices and consumers aren't required to make choices about how much of their own money they'll spend in order to receive the services supplied by government? In other words, what happens to demand when pricing and production/supply are controlled by government?

The answer to all three questions is the same; nothing good.

Here are two additional simple questions. (1) Why would there not be heavy demand for free services, even if that demand is not supported by additional production or supply? (2) And if all the emphasis is on stimulating demand, why would we expect there to be much additional supply created unless the pricing mechanism allowed an acceptable profit to the would-be supplier of that additional production?

So creating demand is easy. And not creating supply for that demand is easy as well. So it's paid for either by taxing those who have the ability to pay for the new demand, or by borrowing from those who are willing to lend us the money to pay for that new demand and support our nation's ongoing spendthrift ways.

Where's it end? Well, it ends when we run out of money or new production to pay for the newly created demand. That time is nigh.

Health Care's Coming Price Revolution discusses the importance of a market price mechanism in relation to value received. The article optimistically predicts that market based and not government mandated pricing will be coming to our health care system soon. Let's see what's already happening in parts of the private sector:

"A more encouraging turn is the gradual emergence of a workable market-driven alternative to all this in the private sector, which is happening for a simple reason: There's no money left.

For decades businesses merely absorbed health-cost increases and effectively took them out of employee compensation. But the erosion of real wage increases that this caused is now too large to ignore. RAND recently estimated that health care consumed 79% of the dollars that otherwise would have gone into paychecks for the average U.S. family during the 2000s. Meanwhile, after the enactment of ObamaCare, premiums in employer-sponsored health plans climbed by 9% in 2011, and they're due to rise another 9.4% by 2014, according to Medicare's actuaries. They further estimate that the increase would be 4.4 percentage points lower without ObamaCare's mandates and rules. . . .

The commercial unit cost trend—the rates insurers pay for services—for 2012 is basically flat, after increasing 5% to 10% over the last decade.

The other important trend in terms of aligning costs and incentives is the growing interest by employers in defined-contribution insurance. Here companies would give their employees a fixed-dollar payment and allow them to choose from a menu of coverage options and make the trade-offs themselves, rather than having their bosses do it for them. . . .

The impulse here is to restore the price signals that will drive U.S. health care to deliver care that is worth the money. But these gains—in transparency and efficient pricing, for instance—will need to be consolidated and expanded to constitute a true revolution. The Affordable Care Act stands in the way.

ObamaCare's core philosophies are standardization and centralization, which in practice will mean higher costs for everyone caused by suffocating price competition. The share of insurance industry revenue that comes from government now stands at 42%, up from 36% just three years ago, and that's before the new entitlement kicks in. And a wave of ObamaCare-promoted provider consolidation is creating hospital monopolies that can demand higher-than-competitive prices.

"Health-care reform" is inevitable. The only question is whether it will run in the direction of prices and choice or more government control."

Governor of Illinois Urges Cuts to Medicaid says this:

"Illinois Gov. Pat Quinn pressed for cuts to Medicaid spending and major pension changes in an annual budget speech that underlined the huge challenges facing one of the country's most indebted states. . . .

"The truth is that over the past 35 years, too many governors and members of the General Assembly have clung to budget fantasies rather than confronting hard realities, especially with respect to pension and Medicaid investments," said Mr. Quinn, who took office three years ago. "Today, our rendezvous with reality has arrived."

Last year, Illinois's Democratic-controlled legislature raised tax rates for individuals and companies. But those levels are scheduled to fall in three years, and lawmakers already have handed tax breaks to some companies to prevent them from moving to lower-cost states.

Mr. Quinn said Illinois must cut spending by $2.7 billion in the coming year on Medicaid, which provides health care for needy and disabled people and has long been favored by Democrats. He said a working group of legislators will have to reconsider all aspects of the program—who is eligible, what services are provided, and how it is paid for—to "save the entire program from collapse."

He assigned another legislative working group to come up with a blueprint for pension reform by April 17, stressing that "everything is on the table." And he said the state will close or consolidate dozens of facilities, including mental-health hospitals and prisons. . . .

Plagued by economic weakness, mismanagement and corruption, Illinois is by some measures the most financially troubled state. It has the largest unfunded pension liability, according to Moody's Investors Service, with accrued liabilities exceeding assets by some $83 billion as of June. . . .

Last month, the state comptroller estimated that the total backlog of unpaid bills owed by state offices—from corporate tax refunds to Medicaid payments—had grown to $8.5 billion."

That leaves Social Security and public education.

The Social Security discussion is easy. It has no funds. All current contributions and more are needed to make payments to current beneficiaries. Yet some people still get upset when Social Security is labeled a Ponzi Scheme. If it's not exactly that, it's close enough for horseshoes.

As for public education funding, it's very much stretched financially. While a portion comes from local property taxes, ~50% comes from state budgets and another 12% comes from the feds, none of the three sources has money to spare.

Of course, local citizens don't want to pay more property taxes, especially when their homes have declined in value. And the federal government and most state governments are teetering financially. Still, we keep spending more on public education and getting less for what we spend. And we pretty much ignore the public sector pension time bomb that's ticking away.

The teachers unions and the doctors' AMA, coupled with government accomplices, are a taxpayer's nightmare when it comes to market based pricing, supply and financial responsibility.

Summing Up

One dollar or unit of production can be used for only one purchase or its equivalent. If we spend that unit of production on Medicare, Medicaid, Social Security, public education or unemployment benefits, it's a done deal.

Unless we produce something to compensate for that demand based expenditure, stimulating yet more demand through government initiatives will only make the hole that much deeper.

Additional government created demand cannot possibly be the answer to any of our financial ills. It will only exacerbate the financial mess we've created for ourselves.

And paying for that new demand with higher taxes would be the wrong thing to do. That's because nothing extra would be produced as a result of raising taxes, and probably less, since we'd be taking money away from a potential investor.

We need more private sector production, as Mill says. How about producing some more oil and gas?

Or how about generating less government spending and waste? Or spending less on post office deliveries? Or reducing the influence of public sector unions and the higher than competitive salaries and benefits they demand and receive?

Or how about letting parents choose the schools their children attend and the prices they pay to do so? Or giving people more choice about medical care, doctor selection, pricing and spending?

Getting more production from cost and quality competitive providers would be very simple. Just give consumers access to useful information about choices, prices and providers, and then allow them to make their own choices.

In other words, take all this demand creation, pricing power and control from the government and give the available money to free individuals participating in a free marketplace.

The lack of supply and high demand for today's "free lunches" would take care of itself in very quick order. And we'd all be better off for having done so.

Thanks. Bob.

Thursday, February 23, 2012

Financial Repression, Bonds, Interest Rates and Dividend Stocks

'Retro Investing'--Look Back to Get Ahead offers solid advice about the most likely investment climate for the next several years:

"It's often said that investors these days are navigating uncharted territory. The world's major economies are swamped by massive amounts of debt, the Federal Reserve has essentially locked interest rates at zero and the outlook for corporate profits is increasingly cloudy.

Many investors are paralyzed by this environment, which is unlike anything they have seen in their adult lives. As a result, they're hunkering down in cash and super-safe government bonds. However, as is often the case, investors can look to the past and find potential guideposts for building a portfolio for today's markets.

In this case, history suggests that stocks with higher dividends could be in for a long period of healthy returns. Looking at the broad stock market, history suggests stocks in general could struggle compared with government bonds as long as rates are capped by the Fed, which is contrary to the conventional wisdom today. But for the longer term, stocks are a better bet than bonds.

For their history lesson, investors should set their wayback machines to the period beginning in the late 1940s. It was a time when bond-market interest rates didn't float freely as they usually do, but instead were capped by the government at low levels to help the country manage the enormous debts accumulated during World War II.


Economists have a gloomy sounding term for when bond-market rates are explicitly or implicitly capped below the rate of inflation. It's called "financial repression."

Today, the Fed is engaged in a similar push. It's been buying trillions of dollars of bonds in an effort to keep market rates low to help repair the economy. The Fed has said it expects to keep interest rates near zero until late 2014. . . .

Low Interest Rates

For the post-war period in which the Fed capped rates, as is the case today, investors earned meager yields. At the time, the Fed was keeping rates just north of 1%, a level which was below inflation. . . .

Meanwhile, stock prices struggled during that period. . . .

As was the case in 2011, during the late 1940s stocks generally suffered from a decline in price/earnings ratios, which reflected less willingness of investors to pay for future growth of corporate earnings. In 1948, government bonds posted returns 1.1% percentage points greater than stock returns when dividends are included . . . .

Bonds were for the most part a better investment than stocks until the Fed lifted the cap on rates in 1951. That year the tide reversed and stocks outperformed bonds by 25 percentage points . . . . Aside from recession years, that trend of outperformance by stocks continued over the course of the decade. (It was 1954, incidentally, when the Dow Jones Industrial Average finally regained its pre-1929-crash level.)

The downside to investing in bonds when yields are capped became clear when the caps were lifted: rising yields pushed down prices on existing bonds.

"Investors can't just invest in Treasurys and expect a return in excess of inflation," says Jason Trennert, chief investment strategist at Strategas Research Partners. . . .

More Risk, More Income

In that environment, investors "have to take more risk to achieve returns that are better than inflation and equities wind up being the most natural choice," says Mr. Trennert. Today, yields aren't as deeply negative, but bond holders are still losing money compared to inflation. Today, the real yield on long-term U.S. Treasurys is a negative 0.6%, according to Strategas.

Throughout the 1940s and '50s, high-yield dividend stocks offered the best returns for stock investors. In the 1940s, dividends comprised 74% of the total returns investors earned on stocks and 40% for the 1950s, according to Strategas.

The greatest outperformance for the highest yielding stocks came during the periods when real interest rates were at their most negative. "The highest yielders outperformed…when we were in the most intense phase of financial repression," . . . .

Dividends subsequently fell out of fashion for many decades. But now, with interest rates low and economic growth expected to be subdued for the next couple of years, dividends are coming back in vogue.

Dividends provide the comfort of an income stream and cushion against falling stock prices. And dividend stocks often have higher growth rates than nondividend stocks, says Mr. Trennert. "The theory is that the discipline of having to pay a dividend generally helps companies avoid bad mistakes," he says.

For investors adding dividends, A. Michael Lipper, president of Lipper Advisory Services in Summit, N.J., warns against simply adding the stocks that have high dividends compared to their prices. Instead, investors may want to focus on strategies aimed at finding companies that will raise their dividends, he says."

Summing Up The Case For Dividend Raising Stocks In A Period of Financial Repression

And exactly what is meant by the term "financial repression," and why is it relevant today? More important, why is it likely to be in play for several more years? And what does all this mean to individual investors?

Let's first consider the benefits to government. For starters, paying interest on government debt is less expensive when interest rates are low. Second, debt repaid in cheaper currencies is less costly in real terms than is debt repaid in stronger currencies.

Today the U.S. is heavily in debt and incurring excessively high operating deficits. Thus, keeping interest rates low combined with a weak currency will help our nation service its financial obligations. In addition, American exports will be aided by a weak dollar due to the improved cost competitiveness of U.S. products selling into the global market.

In simple terms, a heavily indebted government benefits from inflation and a weakened currency. And that country's exports will be enhanced as exporters' competitiveness strengthens due to the currency's weakness.

So while the expression government induced financial repression may sound ominous, and even "gloomy," it's really a very simple concept.

And it's definitely in vogue right now, and will be for the foreseeable future.

Let's benefit from it as individual investors. We'll do that by owning dividend raising stocks and avoiding bonds for the next several years.

Thanks. Bob.

Wednesday, February 22, 2012

Talent Development, Free Choice, Income Inequality and Free Markets

Jeremy Lin is a professional basketball player with a Harvard degree.

Although his basketball talent is becoming widely recognized, it wasn't always thus. Lots of "experts" missed on evaluating Mr. Lin's abilities. Still, Lin hung in there and continued to develop his game. He worked at becoming a better player. Now he's an "overnight success." Yeah, right.

You see, talent recognition by others isn't nearly as important as talent development by oneself. And talent development takes lots of sustained effort.

Lin was absolutely not, contrary to popular belief, an overnight sensation. Talent development doesn't work that way.

The development of talent (knowledge, too) takes time. Lots of time. And effort. Lots of effort. And a belief in our own capabilities.

And sometimes, it takes a little luck for that developed talent to be recognized by others.

LINmigration Service tells the story this way:

"In case you've been hibernating, Jeremy Lin has seemingly come from nowhere to lead the National Basketball Association's previously uninspired New York Knicks . . . .

But Mr. Lin didn't come from nowhere. He was born and raised in the United States after the federal government managed to allow his parents to move here from Taiwan in the 1970s. Like so many others who have enriched America and the world, the two engineers made their way to California's Silicon Valley. Few might have guessed that their son would make his living around backboards instead of circuit boards, and despite his stellar hoops career at Palo Alto High School, there was little interest in Mr. Lin among major college coaches.

But he proved the experts wrong with his play at Harvard and again when he bounced from pro basketball's Developmental League to the end of the Knicks' bench and then into the starting line-up.

It turns out he can split a double team and distribute the ball in a way that makes his teammates better, not unlike (metaphorically speaking) immigrants in other fields. The policy lesson is that America wins when it welcomes talented people, whether or not they start semiconductor companies."

From that happy picture, let's turn to As Job Market Mends, Dropouts Fall Behind:

"While the U.S. job market is showing signs of improvement, one sizable group of workers has been falling further behind: high-school dropouts.

Some 1.8 million more college graduates have found work since January 2010, when the recovery began producing jobs, but about 128,000 high-school dropouts lost work in the same period, according to the Labor Department's Bureau of Labor Statistics.

Less than 40% of the 25 million Americans over age 25 who lack a high-school diploma are employed. And those who are working don't earn much. High-school dropouts earn about $23,400 on average, compared with $33,500 for those with a high-school diploma and $54,700 for four-year college grads, the labor bureau says.

This gap is expected to widen as jobs demand higher skills and more education. In 2020, there will be nearly six million more high-school dropouts than jobs available to such U.S. workers, according to a 2011 McKinsey Global Institute study. At the same time, there will be a shortage of about 1.5 million college-educated workers by 2020.

"High-school dropouts are being left further and further behind," said Susan Lund, head of research for the institute, part of the McKinsey & Co. consulting firm.

Jobs that traditionally employed less-educated American men—construction and low-end manufacturing among them—have dwindled. And men with limited reading or math abilities have trouble getting into job-apprenticeship programs. . . .

Of the more than 1,000 jobs listed on career site in the Pittsburgh area one day recently, only two didn't require a high-school diploma."

Now let's switch gears again in search of a larger meaning.

The fairness of income inequality, President Obama's announced intention to save the middle class and the demonization of the 1% designated as fat cats are all headline stories today. The Occupy Wall Street movement and allied groups want to narrow the gap between the fat cats and the 99%. Does this mean everybody should share equally in the wealth of the nation? Or the wealth of the world? If not, then what does it mean?

If we want to narrow the gap between different groups of earners, the easiest way is to pull down those on top. But assuming we also want to increase the pay scale of those in the middle and near the bottom, why restrict the "fairness" to U.S. citizens?

Some of us were lucky to be born here, but we didn't earn that birthright. It was given to us. What about the less fortunate in the rest of the world? Is it fair to leave them out of our equality crusade, simply because they live elsewhere?.

In much of the world, people on average earn ~$2 per day. So what's fair and what results in equality? Equality of what?

And who's to be included and who's to be excluded in our quest for fairness? Only those who vote for U.S. politicians?

And what individuals are capable of deciding all this? The elitist government officials? Let's hope not.

America has long stood for individual liberties and equality under the law. In turn, that absolutely means unequal results. Otherwise there's no meritocracy and no free marketplace.

In America, dreamers have the opportunity to become successful or failed doers. Some choose to do one thing and some choose to do another thing. And some will choose not to do much at all, if anything.

It's that simple. As Americans we're free to do or not do as we wish, as long as we don't prevent others from doing what they choose to do or not do, too.

And why did Jeremy Lin's parents come to the U.S. when given an opportunity? So that they and he would be paid the same as a high school dropout, high school graduate or even an average performing college graduate? Not likely.

And would paying them or him less cause the dropout to study more, work harder and develop his talent as the Lins did? Not likely.

And would it cause people like the Lins to want to come to America and make the same sustained efforts that they have made at developing their talents? No way.

I know that I was lucky to be born in America and that billions of other people were not so lucky.

Thus, I know that I had an advantage growing up that people in much of the world didn't enjoy. I was free to develop my talents and to choose my own road. They weren't.

When I think of our American freedom to develop our talents as we so elect, a Mexican proverb comes to mind, "There is no road. We make the road as we go." What a powerful thing is the power of experimentation, aka the scientific method.

Others born in America enjoyed similar advantages to those given to me. Some did one thing, some did another, some did a lot and some did not do much at all.

In America we all have similar opportunities to make our own road, to experiment and to learn from our failures. We all have the opportunity of "failing forward."

So how is it to be taken seriously when some Americans complain about how other Americans, and yes, immigrants as well, take better advantage of the opportunities offered to them than the complainers do? I don't get it.

Jeremy Lin tried out and made a team. Then he tried and made another team. And then another. He kept playing and kept developing his talent. He's still doing that today.

He also attended and graduated from several schools along the way, including Harvard. He kept learning and developing his knowledge. He's still doing that today.

Today he's gainfully employed and a real live fat cat. Maybe he'll even choose to start a fat cat business when his hoops days are over.

Then again, maybe he won't. But whatever he does, it will be his choice to make.

And how much he's paid isn't for me or anyone in government to decide. Let's leave that to the marketplace.

And that's what talent development, free choice, income inequality and free markets mean to me. That's a big part of what's fair and great about America.

It's long been the designated American way, and it's the best way. Just ask the Lin family.

Thanks. Bob.

Tuesday, February 21, 2012

Liberty, Personal Responsibility, MOM and Government "Austerity"

One current view says that European countries, as well as the U.S., need more government spending to remedy all the economic issues of today. A contrary argument says that what is needed is the exact opposite approach--less government involvement. Let's examine each.

Paul Krugman is a liberal columnist for the New York Times. He is of the school that we need much more government spending. In Pain Without Gain, Krugman makes his case:

"Worse yet, European leaders — and quite a few influential players here — are still wedded to the economic doctrine responsible for this disaster. . . .

Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.

Now the results are in — and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending. . . .

So what will it take to convince the Pain Caucus, the people on both sides of the Atlantic who insist that we can cut our way to prosperity, that they are wrong?

After all, the usual suspects were quick to pronounce the idea of fiscal stimulus dead for all time after President Obama’s efforts failed to produce a quick fall in unemployment — even though many economists warned in advance that the stimulus was too small. Yet as far as I can tell, austerity is still considered responsible and necessary despite its catastrophic failure in practice.

The point is that we could actually do a lot to help our economies simply by reversing the destructive austerity of the last two years. That’s true even in America, which has avoided full-fledged austerity at the federal level but has seen big spending and employment cuts at the state and local level. Remember all the fuss about whether there were enough “shovel ready” projects to make large-scale stimulus feasible? Well, never mind: all the federal government needs to do to give the economy a big boost is provide aid to lower-level governments, allowing these governments to rehire the hundreds of thousands of schoolteachers they have laid off and restart the building and maintenance projects they have canceled."

Here's my question about Krugman's views. Is he nuts or does he really believe that nonsense? And how would he define government austerity in relation to personal freedoms and responsibilities?

In Krugman's view, austerity means not taking more (MOM) money from individuals to give to politicians to spend on other individuals (OPM), such as hundreds of thousands of additional schoolteachers. In other words, his view of good government is for government to take more money from citizen A in order to give most of it to schoolteacher B, with an interim "handling charge" by government.

But why do I believe Krugman is nuts? Doesn't this all this government "austerity" hurt the economy and the people as well? As a matter of fact, no, it doesn't. What it does harm a great deal, however, is the exercise of free choice about MOM by citizen A.

Since most of us believe in the ideal of individual liberty as the proper path to a better life and a more prosperous economy, the fundamental connection between liberty and personal responsibility must be understood, lest the Krugmans of the world take our liberties from us in the name of "fairness."

Now that we've listened to what Krugman has to say about the evils of government "austerity," let's consider F.A. Hayek's views on liberty and MOM. Contrary to Krugman's liberal dogma, personal liberty and responsibility form the core of Hayek's principled argument for reduced government intrusiveness.

Here's what Hayek said about liberty on page 68 in his 1960 book "The Constitution of Liberty:"

"Not only is liberty a system under which all government action is guided by principles, but it is an ideal that will not be preserved unless it is itself accepted as an overriding principle governing all particular acts of legislation.

Where no such fundamental rule is stubbornly adhered to as an ultimate ideal about which there must be no compromise for the sake of material advantages—as an ideal which, even though it may have to be temporarily infringed during a passing emergency, must form the basis of all permanent arrangements—freedom is almost certain to be destroyed by piecemeal encroachments. For in each particular instance it will be possible to promise concrete and tangible advantages as the result of a curtailment of freedom, while the benefits sacrificed will in their nature always be unknown and uncertain.

If freedom were not treated as the supreme principle, the fact that the promises which a free society has to offer can always be only chances and not certainties, only opportunities and not definite gifts to particular individuals, would inevitably prove a fatal weakness and lead to its slow erosion."

Earlier on page 30 Hayek said this:

"All political theories assume, of course, that most individuals are very ignorant. Those who plead for liberty differ from the rest in that they include among the ignorant themselves as well as the wisest. Compared with the totality of knowledge which is continually utilized in the evolution of a dynamic civilization, the difference between the knowledge that the wisest and that which the most ignorant individual can deliberately employ is comparatively insignificant."

So we have a really simple choice to make; either we choose a society based on (1) freedom and the related personal responsibility that requires or (2) an elitist "government knows best" redistribution approach which results in less individual freedom and greater government dependence.

The knowledge possessed by an elite few is never a match for the cumulative knowledge of the whole society. Of this I'm certain.

I'm also certain that in a free society, when one learns something or discovers something new, the rest of us will relatively soon benefit from that newly discovered knowledge.

I'm also certain that we're all ignorant about most things, but we're all quite capable of learning quickly from others who have gained new knowledge or discovered new things. Hence, increased knowledge by one soon accrues to the benefit of the civilization as a whole.

That's why we shouldn't concern ourselves with income inequality but instead accept it as a way of more quickly spreading prosperity throughout our society as new things are discovered and new knowledge is created. {We'll tackle the income inequality issue down the road but not now.}

For now, just think of Steve Jobs and the example of the Apple iPhone. As is the case with knowledge, in economic terms what begins as the luxury for the few leads to the necessity for the many. But first, someone has to start the innovation entrepreneurial ball rolling, take chances and be allowed to benefit from his actions.

Whenever we take from A to give to B, we're reducing A's freedom to act. And by so doing, we're perhaps slowing our society's advancing knowledge as well as its overall prosperity.

For some reason, the elitist Krugmans of the world can't seem to grasp that simple fact. They don't see, or choose not to see, the unseen or the uncertain related to what A may have done had he been free to do so. They believe wholeheartedly in their elitist government knows best system of redistribution.

One can't possibly know what we all know. Neither can a few know what's best for the whole. And when we take from A to give to B, we'll never know what A would have done had his money not been taken from him by the government.

But we can rest assured that A most likely would have made a much better choice than either the government official or B will make about spending A's money.

To me, the really simple story is that the growth of government spending and continuing interference with liberty and personal responsibility--from the Depression era of the 30s through the Great Society and War on Poverty period of the 60s and including today's stimulus/austerity/debt debacles worldwide--has made us weaker--not stronger. Government has grown more powerful as the people have grown more dependent.

So taking less from A will always be a good thing, even if Krugman calls it "slashing spending" or government austerity.

Less redistribution from private sector individual A to public sector employee B will reduce the intrusive role of government and the amount of government interference in our individual lives.

Allowing more individual choice concerning MOM isn't austerity. Encouraging that choice combined with greater personal responsibility is the absolute right thing to do for one and all, B included.

I'm also certain that A would like that. A whole lot.

Thanks. Bob.

Monday, February 20, 2012

Manufacturing in the U.S. and Overseas ... Lessons From New School Apple and Old School American Crystal

Apple and American Crystal Sugar are both American based companies.

Apple manufactures its iPhones, iPads and most other products overseas. Thus, it has virtually no U.S. union related labor problems. Apple is an example of "new school" manufacturing.

American Crystal Sugar is the nation's largest sugar beet processor. It has lots of U.S. union related labor problems. We'll call American Crystal an example of "old school" manufacturing.

Here's the bottom line. Old school better go to school and learn what it's up against with its new school competitors. Otherwise old school will become no more school.

And we simply can't afford to let that happen to either our U.S. workers or the U.S. economy. Besides, it doesn't need to come to that, even though it's headed that way.

Old school American Crystal does most of its sugar beet processing work in North Dakota, Minnesota and Iowa. Six months ago, after being unable to reach an agreement with its union about changes in work rules and benefits, American Crystal locked out its union represented workers. Replacement workers have been hired in the union workers' place for the duration of the lockout.

What's the difference between a strike and a lockout? Strikes are initiated by unions and lockouts are implemented by companies. When lockouts occur, companies are usually between a rock and a hard place competitively and believe their labor issues are existential if left unresolved. Companies reason that if they don't get needed changes to their labor situation, their business isn't viable, so it's often a last ditch effort to save the company.

In both strike and lockout situations, union workers are without jobs for the duration of the dispute.

More Lockouts as Companies Battle Unions says this about the growing trend of lockouts:

"Lockouts, on the other hand, have grown to represent a record percentage of the nation’s work stoppages, according to Bloomberg BNA, a Bloomberg subsidiary that provides information to lawyers and labor relations experts. Last year, at least 17 employers imposed lockouts, telling their workers not to show up until they were willing to accept management’s contract offer.

Perhaps nowhere is the battle more pitched than at American Crystal Sugar, the nation’s largest sugar beet processor.

Last summer, contract negotiations bogged down, with the company insisting that its workers agree to higher payments for health coverage, more outsourcing and many other concessions. Shortly after the 1,300 unionized workers — spread among five plants in North Dakota, Minnesota and Iowa — voted overwhelmingly to reject those demands, the company locked them out and hired replacement workers.

That was on Aug. 1, more than five months ago, and since then the workers and their families have been scrounging to make ends meet. . . . .

With many private-sector labor unions growing smaller and weaker, and with public-sector unions under attack in numerous states, some employers think the time is ideal to use lockouts, a forceful approach they were once reluctant to use.

Many employers, though, say they have little choice.

Robert Batterman, a labor lawyer who represents employers, said whether it was the N.F.L. or Sotheby’s, which locked out 43 art handlers in Manhattan last July, “the pendulum has swung too far toward the employees, and the employers are looking in these tight economic times to get givebacks.”

“Employers,” he continued, “are using lockouts because unions are reluctant to do what the employers consider reasonable in terms of compromising. Employers are looking to reset their collective bargaining relations.”"

Now let's review the Apple situation. Apple does the bulk of its production overseas.

How the U.S. Lost Out on iPhone Work is a somewhat lengthy but quite excellent article on Apple's overseas production advantages and the worker flexibility it entails. It's well worth taking the time to read the article in its entirety.

In any event, when taken together, the two articles reveal, even excluding compensation issues, a deeply troubling story about the U.S. labor environment in union shops compared to overseas.

While we don't need to go to such extremes as opening dorms for workers, we do need to stop all the infighting and address our very real U.S. competitiveness issues. And these issues are most pronounced with U.S. manufacturing with long established union represented work forces.

Let's hope Steve Jobs wasn't right about manufacturing jobs not returning to America. Here's what he said to President Obama one year ago:

" When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products."

It will be worth taking your time to read the rest of this blockbuster and very disturbing article. I urge you to read it in its entirety.

But in case you don't, here's another brief excerpt:

"Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.

“Apple’s an example of why it’s so hard to create middle-class jobs in the U.S. now,” said Jared Bernstein, who until last year was an economic adviser to the White House.

“If it’s the pinnacle of capitalism, we should be worried.”

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”"

By reading about Apple's manufacturing, you'll see the craziness about the American Crystal labor dispute. Our manufacturing problem is an existential one for lots of American companies and their U.S. work forces.

But unions and politicians apparently don't want to tell the cold hard truth to the U.S. based workers. So they don't and things continue to deteriorate.

Building a Case for Manufacturing Relevance lays out the wide reaching importance of manufacturing jobs and the indirect number of additional workers impacted:

"The rap on manufacturing's rebound is that, while nice, it doesn't count for that much. The sector is not the be-all and end-all of the American economy it once was. Exhibit A: Where a half-century ago factories employed a third of the private work force, now they only employ about one in ten private workers. . . .

But manufacturing's role in the economy extends beyond the factory floor. After a car rolls off the line, it gets hauled by a trucker, and then sold by a dealer, each of whom gets a cut of the sale. It can begin to add up.

One way to see how is to look at the Commerce Department's measure of goods production—the value of goods produced in the U.S., with an adjustment for inventory swings—a category driven by manufacturing.

In the third quarter, goods production accounted for 28% of gross domestic product.

That is well below the 43% share of GDP goods production held 50 years earlier and the 65% accounted for by services today. (The final piece is "structures," like new homes and bridges, at 7%.) But it is still substantial.

Moreover, goods production is 6% higher than at the end of 2007, when the recession began, adjusting for inflation, compared with 2% for the services sector. The upshot is that manufacturing isn't merely a bright spot for the U.S. economy, it is driving it."

We must stop leaving our manufacturing future on autopilot. There's no future in that approach.

It's time to tell the new school Apple story to one and all. That would in turn help solve expeditiously old school manufacturing issues at companies like American Crystal Sugar. One way or the other.

Thanks. Bob.