Archive for March 28th, 2011
One of the brightest regulars who comments on my blog has a totally distorted view of what Libertarian economics is all about. Unfortunately, I am quite confident that her view is mainstream.
Tin Hat writes …
Here is the core premise behind libertarian economics:
The private business sector will put ethics, morality and public employee good above profits, shareholders, bonuses, golden parachutes and CEO compensation — IF they were completely unfettered from any government imposed rules, laws, and regulations.
And IF the private sector entity failed in its fiduciary duty to the public, Main Street would rise up and kick them out.
Regulation Model vs. the Libertarian Model
Sorry Tin Hat but that is not what Libertarian economics is all about or stands for at all.
First let’s ponder the “Regulation” Model.
The “Regulation” model assumes Barney Frank (feel free to substitute your least favorite representative) will write responsible legislation and Congress will stop taking bribes for legislation they want.
Here are some examples of what the regulation models has wrought.
- The regulation model sponsored Fannie Mae and Freddie Mac.
- The regulation model gave huge tax breaks written by GE for GE
- The regulation model encourages flight of jobs overseas
- The regulation model supports corrupt public unions that have bankrupted cities and states
- The regulation model gave us the Fed and its bubble blowing policies
- The regulation model gave us thousands of affordable home programs all of which drove up the price of homes
- The regulation model provides hundreds of billions of dollars of student loans the effect of which is to make those graduating from school now, perpetual debt slaves.
- The regulation model gave us a healthcare bill we literally “had to pass to find out what was in it” according to Nancy Pelosi. Congress did not write that bill, it was entirely written by a consortium of special interest lobbyists.
I can provide thousands of more examples of what the “regulation” model has given us.
The very best financial regulation will ever do is prevent the last crisis. However, we are not going to have another housing bubble for decades. At worst, and far more likely, new financial regulation is highly likely to sow the seeds of the next crisis.
Regulation sponsoring Moody, Fitch and the S&P did just that. So did thousands of affordable housing programs. So did the Community Reinvestment Act. So did sponsorship of Fannie Mae and Freddie Mac. So did HUD. So did thousands of financial loopholes. And most importantly so did the legislation that created the Fed and FDIC.
The legislation model has been disproved in spades yet otherwise intelligent people keep clamoring for more of it as if we could find, hire, and listen to some “all-knowing” super-regulator that can identify the next crisis in advance and write timely legislation that the likes of Barney Frank would deem wise and pass.
The idea is ludicrous given we cannot even get consensus about what to do after the housing bubble has already burst. Also bear in mind the Fed is supposed to regulate the economy. How well did that work out?
It’s preposterous to believe that Congress can identify and appoint some sort of super-regulator because no such person exists in the first place.
Sure, many people identified the housing bubble in advance. I did, so did other bloggers and so did people like Elizabeth Warren.
What good did it do?
I am quite certain a huge number of bight people can identify the next crisis. Indeed they already have. Some people are calling for hyperinflation, some are calling for deflation, some are calling for stagflation, some think Japan will blow up, and others think peak oil will send oil prices to the moon. Some think printing money is a good idea, others don’t.
Lots of people are going to be right because there are lots of people in every one of those camps, and one of them is guaranteed to happen. When one of them does, many people will say “I told you so”.
So who do you want the Fed to believe?
I don’t want the Fed to act on any of those calls because there should not be a Fed in the first place. The Fed failed as a regulator, again, and again, and again.
Libertarian Economic Model
The Libertarian model does not end all regulation. Indeed the basis of the Libertarian economic model is that we need to protect private property, prevent fraud, protect human rights, and give everyone an equal chance under the law.
Had we done that, and “just” that we would not be in this mess.
In the Libertarian model, Fannie Mae and Freddie mac would not have existed. Nor would there have been a Fed keeping interest rates too low, too long. Without the loose lending model of the Fed, and without banks being able to lend more money than they have, the housing securitization model that blew up would not have happened or if somehow it did, it would have been less problematic by orders of magnitude
In the Libertarian model, there would not have been government sponsorship of the rating agencies Moody’s, Fitch, and the S&P.
In the Libertarian model the construct of “Too big to fail” does not exist. Indeed, allowing failure is one of the tenants of the Libertarian model.
Note that something like Glass-Steagall would work in the context of a Libertarian model because its purpose is to put a firewall to prevent fraud. Pollution laws would still be needed to protect private property. Child labor laws would still be needed to protect human rights. Public safety laws are fine. No one would be allowed to yell “fire” in a movie theater.
If you want to take that model and add some social safety nets, all but strict Libertarians might agree.
Failure of Regulation
All the corporatism, all the bank failures, the credit bubble, the housing bubble, and all the warmongering is a direct result “of” regulation that Libertarian economics has nothing to do with.
Indeed most of those those things could not happen in a Libertarian model. To the extent that any of them could happen, they would not occur to the same magnitude.
The solution is to throw away all legislation except what is needed to protect private property, prevent fraud, protect human rights, and give everyone an equal chance under the law.
That means all tax breaks that favor GE as well as all tax breaks for homes, have to go. Tax code should not favor any group or thing. Drug imports from Canada would be allowed in this model and warmongering would stop. Subsidies to home builders would stop. Subsidies for ethanol would stop. In fact, subsidies for everything would stop.
Government would not be allowed to spend more than it takes in, banks would not be allowed to lend more money than they have ownership of, and the Fed would be abolished.
Instead, those in the regulation camp want to patch a million misguided pieces of legislation that should not even exist, and worst of all they expect Barney Frank to get it right.
One model has been tried and failed a million times. One model has never been tried.
Yet misguided souls want more of the model guaranteed to fail. Quite frankly it is preposterous.
Mike “Mish” Shedlock
Global Economic Analysis
How Can America Create Wealth If Our Industrial Base Is Destroyed? 50,000 Manufacturing Jobs Have Been Lost Every Month Since 2001
Any economy that constantly consumes far more wealth than it produces is eventually going to be in for a very hard fall. Many point to relatively stable GDP numbers as evidence that the U.S. economy is doing okay, but the truth is that we have had to borrow increasingly massive amounts of money to keep GDP numbers up at that level. The U.S. government is going to run an all-time record deficit of about 1.65 trillion dollars this year and average household debt in the United States has now reached a level of 136% of average household income. But borrowing endless amounts of money and consuming massive amounts of wealth with that borrowed money is a road that leads to economic oblivion. The only way to have a healthy economy in the long run is to create wealth. But how can America create wealth if our industrial base is being absolutely destroyed? According to Forbes, the United States has lost an average of 50,000 manufacturing jobs per month since China joined the World Trade Organization in 2001. Hundreds of formerly thriving industries in the United States are being totally wiped out. China uses every trick in the book to win trade battles. They deeply subsidize their domestic industries, they openly steal technology, they blatantly manipulate currency rates and they allow their citizens to be paid slave labor wages. So yes, the products coming from China are cheaper, but in the process tens of thousands of factories in the U.S. are shutting down, millions of jobs are being lost and the ability of America to create wealth is being compromised.
In 2010, the U.S. trade deficit was just a whisker under $500 billion. Much of that trade deficit was with China.
During 2010, we spent $365 billion on goods from China while they only spent $92 billion on goods from us.
Does a 4 to 1 ratio sound like a “fair and balanced” trade relationship to anyone out there?
Our trade deficit with China in 2010 was the largest trade deficit that one country has ever had with another country in the history of the world.
In fact, the U.S. trade deficit with China in 2010 was 27 times larger than it was back in 1990.
Needless to say, that is not a good trend.
Our industrial base and our ability to create wealth is being wiped out so rapidly that it has now become a very serious threat to our national security.
According to Forbes, there is only one steel plant inside the United States that is still capable of producing steel of high enough quality to meet the needs of the U.S. military, and even that plant has been bought by a European company.
Meanwhile, China produced 11 times as much steel as America did last year.
Not only that, China is now the number one supplier of components that are critical to the operation of U.S. defense systems.
How in the world did we let that happen?
So what happens if we have a conflict with China someday?
But of more immediate concern is the loss of jobs that the destruction of our industrial base is causing.
For example, the Ivex Packaging Paper plant in Joliet, Illinois just announced that it is shutting down for good after 97 years in business. 79 good jobs will be lost. Meanwhile, China has become the number one producer of paper products in the entire world.
But China is not just wiping the floor with us when it comes to things like steel and paper.
The truth is that China has now become the world’s largest exporter of high technology products. Back in 1998, the United States had 25 percent of the world’s high tech export market and China had just 10 percent. Ten years later, the United States had less than 15 percent and China’s share had soared to 20 percent.
So how is China doing it? Well, as noted above, they are pulling every trick that they can think of.
Most Americans think that we have “free trade” with nations such as China. That is a complete and total lie and anyone that believes that we have “free trade” with China does not know what they are talking about.
China subsidizes their domestic industries to such an extreme extent that many global industries no longer even come close to resembling “free markets” as a recent story in Forbes noted….
According to a story in the January 20, 2009 New York Times, government subsidies so thoroughly disrupted pricing in the global market for antibiotics that many western producers had to either move facilities to Asia or exit the business entirely. The reason this might matter to intelligence analysts is that the last U.S. source of key ingredients for antibiotics — a Bristol-Myers Squibb plant in East Syracuse, New York — has now closed, leaving the U.S. dependent on foreign sources in a future conflict.
Our politicians and our business leaders have pursued economic policies that are so self-destructive that it defies explanation.
How in the world could anyone be so stupid?
Since 2001, over 42,000 U.S. factories have closed down for good. Millions of jobs have been lost. The ability of the once great American economic machine to create wealth has been neutered.
The business environment in America is completely and totally pathetic at this point. The number of small businesses that are being created is also way, way down.
According to the U.S. Census Bureau, only 403,765 small businesses were created in the 12 months that ended in March 2009. That was down 17.3% from the previous year, and it was the smallest number of small businesses created since records began being kept in 1977.
The truth is that the U.S. economy is dying.
We continue to consume about the same amount of wealth that we always have, but our net worth is declining.
According to the Federal Reserve, more than two-thirds of Americans have seen their net worth decline during this economic downturn. In fact, the Fed says that between 2007 and 2009, the wealth of the average American family declined by 23%.
So if it seems like your family and everyone around you is getting poorer, that is because it really is happening.
We really are becoming poorer as a nation.
We can see evidence of this all around us. Just consider a few of the examples that have been in the news in recent days….
*One school district in the Chicago area is laying off 363 teachers.
*The U.S. Postal Service is offering $20,000 buyouts to thousands of workers as they attempt to slash 7,500 good paying jobs.
*The city of Detroit, once a shining example of middle class America, is now a rotting cesspool of economic decline and it saw its population decline by 25 percent over the decade that recently ended.
Americans are not feeling the full impact of America’s industrial decline yet because we have been filling the gap in wealth creation with massive amounts of debt.
In the years since 1975, the United States had run a total trade deficit of 7.5 trillion dollars with the rest of the world. That 7.5 trillion dollars could have gone to support U.S. businesses and U.S. workers, but instead it left the country and went into the hands of foreigners that do not pay taxes.
Therefore, the U.S. government, state governments and our local governments have had to borrow massive amounts of money to make up the difference.
Most people do not realize it, but the destruction of America’s industrial base has played a very significant role in the government debt crisis we are facing today.
In addition, the millions upon millions of workers that have lost their jobs as America’s industrial base has been destroyed are now a drain on the system. Instead of creating wealth and being involved in economically productive activity, millions of American workers are now totally dependent on the U.S. government for survival.
Do you think that it is just some sort of accident that we have 44 million Americans on food stamps?
Don’t you think that a large percentage of those people would actually like to have good jobs that would enable them to sufficiently feed their families?
If we continue on the path that we are currently on we are not going to have much of an economy left.
Not that all trade is bad. Certainly not. For example, trade with Canada is generally a very good thing.
However, the horribly unbalanced and unfair trade relationships that we have with nations such as China are ripping our industrial base apart. Our politicians have not been telling us the truth about what the “global economy” will mean for American workers. Most U.S. workers never realized that globalism would mean that they would be competing for jobs with workers willing to work for one-tenth the pay on the other side of the globe.
Those people that believe that we can indefinitely maintain an economy where we consume far more wealth than we create are completely and totally delusional.
Until the American people wake up and start demanding change from our politicians on these issues, 50,000 (or more) manufacturing jobs will continue to fly out the doors every single month and even more Americans will become dependent on government welfare.
Is that what you want?
Personal income increased $38.1 billion, or 0.3 percent, and disposable personal income (DPI) increased $36.0 billion, or 0.3 percent, in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $69.1 billion, or 0.7 percent. In January, personal income increased $147.4 billion, or 1.2 percent, DPI increased $92.0 billion, or 0.8 percent, and PCE increased $29.5 billion, or 0.3 percent, based on revised estimates.
Remember that the January number was dramatically boosted by the tax changes for FICA. That sounds good except that it flows directly to the deficit – that is, we’re simply kiting checks. Now that one-timer has gone through the system.
How’s it working out for consumers when one looks at actual purchasing power?
Real disposable income decreased 0.1 percent in February, in contrast to an increase of 0.5 percent in January. Real PCE increased 0.3 percent, in contrast to a decrease of less than 0.1 percent.
The one-timer in January masked what was otherwise an 0.3% decrease. Now it’s gone. The money-printing simply shifted where the negative number showed up – in this case, on the government balance sheet. But again, that was a one-time deal and now the impact has been taken, and in February we got to see the impact of an actual decrease in purchasing power. The “make me feel richer” attempt from that tax change, however, did result in a bump in spending. Remember, this is February – before all the fund in Libya, Japan and elsewhere.
The January change in personal contributions for government social insurance reflected the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which temporarily decreased the social security contribution rate for employees and self-employed workers by 2.0 percentage points for 2011, or $105.4 billion in January.
WHAT?! $105.4 billion in change in tax receipts in one month? Please tell me I’m reading this wrong – I thought the CBO said this change in the tax code was a $400 billion deficit addition for the full year. How did we get over a hundred billion in one month? That can’t be right – that would be close to half of the entire federal income and social insurance tax receipts from this one change! If this is anything close to correct we’re in much more trouble than I had first thought in terms of tax receipts and deficits. My current estimate is about $2 trillion for Calendar Year 2011; this would boost that to near $2.5 trillion!
PCE price index — The price index for PCE increased 0.4 percent in February, compared with an increase of 0.3 percent in January.
Oh that’s nice – headline inflation of about 5% eh? That ought to make people really, really happy. NOT.
Watch those tax numbers folks. If that value is anything close to correct we’ve got a monster problem coming at us later this year with deficits and the arm-waving nonsense coming from Congress about $60 or $100 billion in “spending cuts” are going to do exactly nothing, as revenue decreases from the tax change is going to swamp that figure by a factor of ten.