Everyone Wants To Keep Their Cake

If you didn’t know, we’re in some pretty tough economic times.  Oh, you’ve heard?  Because, obviously, many people have not… or at least that’s the conclusion you could draw, if you’ve been following some of the big developments, lately.  Exhibit A:  The auto follies.  The headlines this week tell of how GM and Chrysler will now have to defend their decisions on dealership closings before the senate.

Because the federal government is slated to own most of General Motors and 8 percent of Chrysler, some of the senators said they have a responsibility, as major shareholders do, to review company decisions.

Oh, sure.  And “as major shareholders do,” I’m sure you’ll be considering what’s best for the company, rather than what’s going to help you look good for voters in your state. Hey folks, welcome to reality!  GM and Chrysler are bankrupt.  They are restructuring, under the direction of the courts and the federal government.  They were told to trim their product lines, eliminate brands, and ratchet down their operations, in order to achieve something like sustainability.  This has to happen.  If it doesn’t, GM and Chrysler die.  And then ALL of their dealers will be out of luck.

“Let me be very clear — I don’t believe that companies should be allowed to take taxpayer funds for a bailout and then leave local dealers and their customers to fend for themselves with no real notice and no real help. It’s just plain wrong,” [Sen. Rockefeller] said.

Just plain wrong?  The whole idea here is to try to save an American industry so that it can again become a job creator, and so that it can again support the businesses built up around it (parts suppliers, tool makers, dealerships, etc).  Is there to be no pain?  Should we be bailing out the auto dealerships, too?  Yeah, let’s send ‘em all a check for the money they would have made had GM and Chrysler not gone belly-up.  The Fed can print more money.  Who cares?

Exhibit B:  The (Once) Golden State.  California is on the brink of bankruptcy.  Years of free spending in fat times have finally caught up to the state, and now, if it is to have any hope of avoiding a financial collapse, meaningful cuts have got to be made.  But, surprise surprise, no one wants to be on the receiving end of those cuts.  The California state government worked out a plan that would have involved trimming the state contribution to home healthcare workers’ wages, and the SEIU (which represents those workers) rebelled, taking the case to Washington.  The Obama administration decided to use the stimulus money slated for California as a stick (another big surprise) to bully the state into undoing the wage cutbacks.  So, instead of a $2 per hour cut, the SEIU would prefer to have the state go bankrupt.  Another example comes with California’s decision to close ~220 state parks — people are rallying against it.  Sure, there’s a potentially legitimate argument to be made that shutting down the parks will impact economic activity to such an extent that the move defeats its own purpose.  But there are still plenty of reasons for tourists to visit the state — and something has to be cut.  If California cannot close it’s budget gap, destroys its credit rating, and cannot secure the funds it need to keep operating, more than just the state parks will be closing.

I hate to resort to generational generalizations, but it’s hard not to see that Americans have become incredibly spoiled.  We can’t all have everything we want, all the time.  We can’t always expect things to be the same as they are during the best of economic times.  The government can’t artificially support the fat living that we’ve grown accustomed to, when times are lean.  The economy and the financial system have to go through a necessary process to right themselves.  The process can be painful, but if it doesn’t happen, nothing gets fixed.  We simply cannot have our cake and eat it, too.

Because the federal government is slated to own most of General Motors and 8 percent of Chrysler, some of the senators said they have a responsibility, as major shareholders do, to review company decisions.

A Lesson In The Problem Of ‘Big Government’

<sound of cobwebs being cleared…>

Got back from a 2-week semi-vacation (I worked, most of it) about 2 weeks ago.  I had meant to post something sooner, but I couldn’t find much motivation.  But just now I came across an article in Forbes describing what is being done wrong, with respect to the Chrysler bankruptcy.  After reading it, I realized that what’s happening in this case actually illustrates a point about government expansion that I had tried to make in a pre-election post.  Essentially, that point was that handing over more of the private economy to the government is a bad idea, because government agencies do not respond to the realities of the market, and are therefore destined to be inefficient and to exacerbate the problems they’re supposed to be addressing.  Or, more generally, giving more power to the government will inevitably lead to abuse of that power, as well as waste.  The Chrysler saga seems to demonstrate this pretty well.

As we all know, the federal government got involved in the “rescue” of GM and Chrysler, by loaning them billions of dollars, intended to give them a chance to fix themselves.  At the time, there were some voices saying that the companies should be allowed to go into bankruptcy, if they were not able to fix themselves without government help.  But, mostly, what we heard were things like, “Bankruptcy is not an option!” and “They’re too big to fail!”  President Obama promised to “save” the US auto industry (yes, I know the Bush administration started the ball rolling), while also saying he had no interest in running the car companies.

And where are we now?  The president has demanded that Chrysler and GM submit to his administration plans to achieve viability — and has rejected parts of the plans, demanding revisions  (so much for “no interest” in running the companies).  In the case of Chrysler, after dumping billions more in taxpayers’ money into the company (read: waste), he has forced it into bankruptcy (not an option?) and into a deal that will divide ownership of the company among Fiat, the US and Canadian governments, and the UAW — with the union getting the majority stake in the company.  In the process, the administration is strong-arming Chrysler’s creditors into taking a much less equitable deal than they would expect under the law, in a normal bankruptcy (read: abusing power).  He has allegedly used the TARP money awarded to many of those creditors as leverage to get them to agree to the deal.  (Funny thing here, he’s actually forcing TARP-receiving creditors to further hurt their own balance sheets by giving up money to which they are legally entitled.)

Why are things being done this way, when Chrysler declaring bankruptcy months ago would have saved billions in taxpayer money, and left legal decisions in the hands of the courts, where they belong?  Well, the two reasons I can come up with are foolishness: the president believes he knows better than the bankruptcy courts and people with relevant industry experience; and politics: the president gets to claim that he’s “doing something,” he gets to tilt the deal to favor a major constituent group (unions), and he gets to gain more leverage over private industry, and therefore more political power.  This is exactly the problem with expanding the role of government further into the private sector.  The motivations and accountability are very different, and most often are not focused on or responsive to the true needs of the market, a.k.a., the people.  Instead of getting the most efficient solution to the problem at hand, we get grandstanding, power-grabbing, and billions more dollars wasted.

Now, let’s get the government into the health care business….

… But He Doesn’t Like Big Government

“Let me be clear: the United States government has no interest or intention of running GM. What we are interested in is giving GM an opportunity to finally make those much-needed changes that will let them emerge from this crisis a stronger and more competitive company.”

These words are from President Obama’s address about his plans for the auto industry.  We don’t want to run the auto companies… aside from maybe making some staffing decisions, exercising veto power over restructuring plans, providing “guidance” in developing such plans, and being directly involved in negotiations with potential partners. That’s all. Oh, and we’ll back the warranties. But that’s it. Oh yeah, and we’ll fund operations for a while.

This tendency of Obama’s to do one thing and then say the total opposite brings to mind an old Eddie Murphy bit, in which a woman catches her man coming out of another woman’s house, confronts him about it, and he just says, “Wasn’t me.” She keeps after him, but he just keeps saying, “Wasn’t me,” until she comes around: “Well, maybe it wasn’t you.”

But more than the sheer audacity of his double-speak, the real problem is with what Obama’s administration is actually trying to do here.  They are doing nothing short of attempting to take over for the free market and the existing legal system.  The US auto companies are “too big to fail,” so, we can’t let them go bankrupt, so, we’ll loan them money to give them a chance to fix themselves.  But then we’re going to treat them pretty much the same as if they had declared bankruptcy –  force everyone involved to renegotiate contracts, force them to come up with a recovery plan that meets an outside party’s criteria, involving selling off parts of the companies, and consolidating (eliminating) brands — but with the administration running the show, instead of a court.  In the case of Chrysler, at least, the government will even mandate what kinds of cars the company can produce!

What the hell is going on, here!?

This country was conceived around the idea of freedom.  Freedom meant that no authority could tell you how to live, force you to follow a particular religion, keep you from seeking to rise up from the “class” into which you were born.  There were to be no noble lords, here.  Anyone, through hard work, dedication, and luck, would be free to succeed.  That freedom includes — necessarily! — the freedom to fail.  Our history is littered with failures, big and small.  But it is also littered with successes, most of which have come out of the failures.  And, on balance, the successes have vastly outweighed the failures — which is why ours has been the most successful country in human history.

Does the President of the United States not know this?  Can he really believe that bankruptcy at GM and/or Chrysler would mean the “disappearance” of the auto industry from the US?  That entrepreneurs would not find opportunities in the ashes of the old, burnt out, auto companies?  Does he really believe that government agencies and politicians can force businesses to be successful?  (It is pretty obvious that he does.)  Just think about the audacity involved here.  What his actions are saying is that he, with the experience of his 47 years of life, never running any business, can manage not one company to success, but entire industries!  He knows better.  He knows who can do the best job.  He can identify the best course.  It is absolutely insane!

I’ve said this before:  Either you believe in free-market capitalism, or you do not.  So, when the president says he doesn’t “like big government, ” and when he says he doesn’t want government running the auto companies, and when he says that he’s not interested in nationalizing the banks, but then he turns around and explodes the size of government, and tells the auto companies and banks how they’re going to run their business, the truth is pretty obvious.  It doesn’t matter what he says about these measures being temporary –  he simply does not trust free-market capitalism.  Period.  And that means that he doesn’t really trust freedom, because the two are inextricably intertwined.

When Obama was elected, I was more worried about congress running right over him, with spending on all kinds of big-government projects, than I was about him.  Though he had promised everything to everyone, in his nomination acceptance speech, I still thought that maybe he really could be something different — that maybe he would try to exercise some restraint in his application of government power.  But in just a couple of months, he has shattered any illusions I had about him.  He is a man who absolutely believes that the government — better than the mass of the free people, better than the free market — can solve all of our problems.  He truly believes in a very different America than the one in which I believe.

Republicans Take My Advice On Stimulus?

In my post about the recent Democrat-led spending spree, I suggested that there were plenty of things the government could do to stimulate the economy without spending a ton of (borrowed) money.  My first example was opening up domestic energy production, by making it easier to build refineries and nuclear plants in the US, thus creating jobs here, and potentially lowering the cost of energy — an effective “tax cut” for every single person and business in the US.  Well it seems like maybe someone was listening.  Representative John Shadegg (R-AZ) and Senator David Vitter (R-LA), are planning to propose a “No Cost Stimulus Act,” which aims to create jobs and stimulate the economy by promoting domestic energy production.  They say they’re sticking to the “all of the above” (I hate that slogan) approach, meaning their bill would be aimed at the promotion of domestic drilling for, and refining of, oil and natural gas, plus nuclear power and alternative energy development and production.  They would do this by getting the government out of the way, not by spending a bunch of money.  Hey!  What a novel idea!

Of course I don’t really think they got the idea from me.  But it’s nice to see that some of our politicians can stumble across the obvious solutions, too, once in a while.

Life, Liberty, And A Subsidized Mortgage

Something tells me this is not what the founders had in mind.  President Obama has announced his plans to help people “struggling” to make their mortgage payments, with the goal being to “keep people in their homes.”  Sounds so nice, doesn’t it?  But what does it actually mean?  Well, it means that those of us who pay taxes will now be paying someone else’s mortgage, on top of the mortgage or rent we already pay.  That seems fair.  It also means that the market will not be allowed to readjust home prices (by forcing people to sell while prices are down, and by adding many more forclosed properties to the pool), which in turn means many of those same “struggling” people will not have cheaper housing options to which to turn.  Makes a lot of sense, right?  Let’s artificially prop up home prices so that people will need assistance in order to afford a home.  Brilliant!

Some people, like my wife and I, thought ahead, when we bought our last home.  We put 20% down, and made sure we’d be able to keep paying our mortgage, should one of us lose our income.  As careful as we were, circumstances lead to us selling our home in this down market, and taking a hit for it — which we did in order to avoid taking a bigger hit should the market continue to decline (which I believe it will), and to bring down our monthly expenses.  Little did we know that, if we just waited long enough, until we really started to struggle, the government would come along and give us other people’s money, so that we would not have to sacrifice our way of life.  And now that we have made sacrifices, our president is trying to prop up housing prices (for those who have not made the same sacrifices), which will wind up hurting us even more.

How can this supposedly brilliant man think this is a good idea?  Seriously, what are the arguments?  We’re not keeping these people in their homes so that they can borrow against them and spend money (economic activity) — there’s no value to borrow against.  Keeping them in their homes does not relieve the financial burden they’re under, as being forced to find a cheaper alternative would.  So what’s the deal?  Is this about propping up the value of mortgage-backed securities?  Is this about saving investment firms?  Are the hundreds of billions we’re throwing at them not enough?  Or is it about winning the next election (by buying votes)?  And what about simple fairness?  Why should those of us who were careful to stay within our means now be forced to subsidize those who were not?

What has happened to our country?

Stimulus Or Just Spending? That’s The Wrong Question

I can’t say that I usually find myself agreeing with an opinion piece in the Washington Post, but I was happy to see someone point out some of the silliness in the debate about the economic stimulus bill making its way through Congress.  The author shoots some holes through some of the primary arguments being used by Republicans in Congress against the Democrat-drafted bill(s).  And he’s right — it’s silly to say that one kind of spending is stimulative while another is not.  It doesn’t matter where you spend the money, because it will wind up in the economy (someone will get paid for a product or service, and will then spend that money on something else, thus boosting economic activity — or so the thinking goes).

The author then touches on a more relevant point about what kind of value different types of spending will yield for the country.  For example (mine, not his), updating highways and communications infrastructure will result in jobs and extra money in the economy in the near term, and potentially higher productivity in the longer term, while pumping more money into NEA grants or fixing trails in national parks will inject the money and potentially employ some more people now, but will be of little value to the economy later.  The problem is that he then pretty much abandons this point in favor of simply ridiculing Republican opponents of the bill.  His mockery of Senator Tom Coburn and the Wall Street Journal, for complaining about so much of the job creation being in the public sector, is ridiculous.  Of course that type of job growth is “inherently inferior” to private sector growth.  For several reasons:  1) the government is never a model of efficiency, so many of those jobs will be created just for the sake of creating jobs; 2) unlike in the private sector, where jobs follow the need for manpower, when a government job is created, it is very rarely eliminated when the need goes away; 3) an ecomony in which more and more people are employed by the government is not free — the market does not determine what type of labor is valuable, a political agenda does.  All of these things mean that the overall value of many government jobs to the economy could be completely marginal.

That said, I still think questioning the stimulative-ness of different types of spending is silly.  And it’s the wrong question.  Sure, if you’re going to do stimulus spending, you should attempt to get the best return on investment that you possibly can.  But the more important question is:  should our government be attempting a stimulus, through spending, at all?  That’s where the philosophical debate needs to happen.  In my opinion, the answer is no.  The federal government should not be looking to spend a TON of money that it does not have in an attempt to stimulate the economy.  Now, that doesn’t mean that I think the government should be doing nothing at all to try to improve the current situation.  But just spending a lot of money is not the answer — especially when it puts the government (and thus the taxpayer) in an overwhelmingly bad situation, by decreasing the value of the dollar and possibly destroying our ability to get credit.

So, what can and should be done?  Anything that helps to increase the productivity of American workers and producers.  Sure, there can be some government spending (where it’s really the government’s responsibility) on infrastructure projects, but mainly the government should seek to remove barriers to increased productivity, wherever it can.  For example, relax some of the regulation that’s made it nearly impossible to build a refinery or nuclear plant in the US for so many years.  This would result in the immediate benefit of new jobs for US workers (without having to hand out cash), plus reduced energy costs (which would boost every part of the economy) in the future.  Seek to lower the cost of conducting business, especially for small businesses, to allow them to spend more of their revenue on growth.  Simplify the tax code wherever possible, to allow less money to be spent on compliance, and more to be invested in businesses.

There are no doubt many other ways the government can help increase productivity, which is what will truly help lift the economy, as opposed to doing what amounts to making a loan to the economy to foster the appearance of improved activity.  Come on now, be creative.  Change we can believe in, right?

Can Everyone Please Just Take A Deep Breath?

Has our country gone completely insane?  Out government is bailing out entire industries.  The incoming president is promising to spend unheard of amounts of money (that the government does not have).  And nearly everyone seems to be perfectly OK with this — or at least tolerant of it.  We all got into the mess we’re in (people, companies, governments) because we over-extended ourselves.  And now it seems like everyone wants to call a do-over.  We can’t just wipe away the mistakes we’ve made and start over.  It doesn’t work that way.  If the federal government pours a trillion dollars into the economy, this year, in an effort to ease everyone’s suffering, there will be consequences to be faced.  We don’t have the money to spend.  That means that we’ll either have to just print it, and drive down the value of the money we do have, or we’ll have to borrow it.  At some point, those who are lending it to us (by buying bonds and such) are going to realize that they’re no longer going to be able to expect much of a return.  The rumblings have already begun.  So then what?

How about this?  Stop overreacting!  Yes, we want the economy to turn around and start growing again.  But, as we’ve seen over and over again, when the growth is artificial, the collapse can be brutal.  So, stop.  Let the economy find it’s footing.  Let businesses work out how they’re going to work things out.  Don’t dangle the promise of billions of dollars in front of them, so that they don’t take the steps they know they should, because they’re waiting for their big government payday.  Let housing prices find some natural equilibrium.  Sure it hurts the people (like me) who are losing a lot of the money they sunk into their last home purchase.  But those people (like me) will be able to take advantage of those same lower prices when they look for a new home.  In fact, let prices in general find a more natural level.  People will not produce things on which they cannot make money, but that doesn’t mean nothing will be produced.  Do we really think there’s no room for the price of that $2 bottle of water to come down a bit?  How about the $80 sweater?  Can’t get by selling it for $60?  (Or $40?)  Come on.  We all know we spend way too much money on things we don’t really need.  Let those things get squeezed a bit.  And how about letting some states get squeezed a bit.  California is running a huge deficit?  Well, maybe now is a good time for California to figure out just why the heck it’s spending so much money.  Maybe it will take taxpayers not getting their refund checks to make them (finally) hold their representatives’ feet to the fire.

We are not headed for catastrophy.  We’re not all going to lose everything we have.  Many of us will lose some.  And some of us will have to make some major adjustments.  But the world is not ending.  These times do not call for unprecendented measures.  Unprecedented measures have unknown consequences.  So, slow down.  We have a very rational system, when it’s permitted to be rational.  Let’s let it do its thing.

Seriously, Mr. Bush?

I’ve never been one to jump all over our current, linguistically-challenged president when he’s misused words or destroyed the meaning of what he was trying to say with a clumsy delivery.  The man is not a good speaker — that’s obvious.  I’m also well-aware that President Bush has very few deep philosophical convictions about governing.  He indicated as much, during his first campaign for the White House, when he sold himself as a “pragmatist” (something more philosophically rooted conservatives interpret as lacking true principles).  However, I did believe he had at least some understanding of the philosophical basis for many of the decisions he’s made.  But a recent comment, from the president, in a FoxNews interview made me question if the guy really had any idea what he was saying.  Here’s the quote:

“I’m a free-market guy. But I’m not going to let this economy crater in order to preserve the free-market system.”

Uh… what?  If you’re a “free-market guy,” then it means you believe the “free-market system” is best for fixing problems in the economy.  Think about that quote.  He’s basically saying that he believes in free-market economics, except for when he doesn’t.

Perhaps I shouldn’t be too hard on the president.  It seems our entire country, including lots of big-time “free-market guys,” are ready to abandon the free-market system in order to save the economy (or themselves).  Generally speaking, we’ve become economically backward.  The beauty and genius of the free-market system is that it is so dynamic.  Sure, the system allows spectacular failures to occur.  But it also allows for spectacular successes (and moderate ones, as well).  The system encourages taking risks (risking failure) in order to produce success.

Either you believe in the free market or you don’t.  I do.  I believe that the pain we’re feeling now will lead to numerous opportunities and the eventual emergence of new, dynamic, and healthy businesses.  In the case of the auto industry, I believe that even if the so-called worst case scenario comes to pass, and one (or more) of the “Big 3″ collapses, it will not be the end of the auto industry in America.  Although GM, Ford, and Chrysler have all lost market share over the years, they still hold a huge percentage of the overall market.  If, for example, GM were to fail tomorrow, they would leave a huge void for other companies to fill.  Perhaps the fastest way to do so would be to buy up portions of GM, hire many of their former workers, and leverage their production capacity to supply more cars — maybe even by continuing to build some of GM’s current line.  And that’s just one possibility.  The point is that the free market will find solutions, if it is allow to be free.  And the president should know this.

Inflation? Deflation? It’s All Relative

Lately, we’ve been starting to hear more and more about the looming threat of deflation.  One article I read made the scary-sounding pronouncement that once you get into deflation, you cannot get out.  So, deflation is the Roach Motel of the financial world, eh?  Forgive me for being skeptical, but I just don’t see the reason to be so scared.  Haven’t we been told forever that inflation is the bogeyman?  Hasn’t the Fed played ping-pong with interest rates with “keeping inflation in check” as a main goal?  And now we’re supposed to believe inflation is actually our friend?  We work more, we get paid more, and then we spend more on the same things — so we wind up in the same place.  We spend dollars now on what we used buy for pennies — remember when being a millionaire actually meant something?  Now you can be “worth” a million dollars, and still be plain old middle class.  So, please, don’t tell me that deflation would be the end of the world.

I understand the effect deflation has on debt: if money is worth more, then debts are effectively bigger.  And?  Let’s say we have true deflation, where prices fall, and wages fall with them.  Then all those people carrying debt have a bigger burden to bear.  OK.  Won’t their creditors look to the same mechanisms they always have, in such situations?  Wouldn’t they work with their borrowers to restructure the debts, and seek to recover part of the amount instead of losing the whole?  Why wouldn’t they?  So what if they’re getting less money back?  Less money is worth more, right?  Same goes for their creditors, and so on up the chain (though “up” may be a misleading way to characterize it, as the chain is more likely pretty much circular).

I’ve heard that deflation makes it less likely that lenders will lend, because, as the argument goes, they know it will be difficult for borrowers to pay them back, because deflation will sap borrowers’ earning power.  Again, I have to say, so what?  First of all, lenders always have to manage the risk of borrowers being unable to pay them back.  One of the challenges of inflation is that lenders need to recoup enough to stay ahead of it.  But with deflation, the lender is always going to stay ahead, even making loans with a 0% interest rate.  So, intelligent lenders will still be able to come out ahead while lending money.  Hey, maybe this is precisely what we need to purge all of the bad lending practices that crept in when everyone knew that everything was always going to go up up up!

The biggest problem with inflation is that there is no ceiling. Prices can continue to climb, as long as wages and the amount of printed money keep pace.  Deflation doesn’t have that problem.  This is where that “once you go in, you never come out” nonsense falls apart.  Sure, prices can drop until something that once cost dollars is back to costing pennies.  But at some point, some reasonable minimum must be reached.  Prices cannot reach $0 because no one will produce anything for absolutely nothing.  And people need things.  So, those things will be produced and paid for.  (And no one is going to advocate the minting of tenths or hundredths of a penny — because that would be stupid.)  People will realize that money is just a representation of goods and labor, and those goods and labor have intrinsic value.

My point here is that everything is relative.  Price has no meaning, in an absolute sense.  My parents house, which cost about $70k in 1975 would now cost more than ten times that.  But it’s still the same house, on the same property, in the same neighborhood, with the same schools, etc.  So, really, all it’s worth is what it is: a nice house, in a nice neighborhood, with decent schools.  The difference between the apartment we lived in when I was a little boy and the house that is now worth about $700k, is the 30+ years of labor that allowed my parents to own it.  If my parents sold that house today, they wouldn’t be rich.  They still have to pay to live somewhere.  And if they wanted to live in the same area, they could not afford to live any better.  They could only afford live in something of the equivalent value of a nice house in a good neighborhood, with decent schools.  Their other choice would be to downgrade on the house/neighborhood/schools, and take back some of that 30+ years of labor in the form of cash in their pocket.

Money only represents value.  Real value is in goods and labor.  How hard do I have to work to afford the things I need?  That’s how you measure the true value of a thing.  So, let’s not worry so much about the “value” of a dollar.  Inflation and deflation cannot both be all bad.  There are obviously positive and negative side-effects from both.  While changes in the value of money relative to goods and labor can cause some pain in the short term/small picture (change always does), in the long term/big picture, the fluctuations are pretty much meaningless.  So, let’s lighten up with the doomsday talk about deflation, shall we?