Economists have it all wrong

From the Knoxville News-Sentinel November 1, 2009


I read somewhere that 80 percent of economists polled said the recession was over. Experience tells us that if 80 percent of economists agree on something, then they are wrong. Remember when these same economists said that the passage of the stimulus bill would keep unemployment below 8 percent? When have you ever heard it reported that "the results are what economists had predicted?" Never.

Instead, it's "the results are different than what economists had forecast." The obvious conclusion is that the recession is not over.

When asked to explain the dismal employment picture, we are told that this is a "jobless recovery." This is an oxymoron and the last five letters aptly describe those who utter it. There is no such thing as a "jobless recovery." The economy recovers when people go back to work.

What is transpiring now is that businesses are reluctant to hire back workers even with an uptick in demand. It is costly to hire workers and is cheaper to pay current employees overtime. More workers won't be hired until employers are confident that the recovery is not temporary. Employers also are uncertain about the future because of the potential job-killing likelihood embodied in cap-and-trade, some of the proposals bandied about in health care reform, the increase in the minimum wage and increases in marginal tax rates.

I wrote on these pages that the increase in the minimum wage would increase unemployment among those who are paid the minimum wage. So tell black male teenagers that the increase in the minimum wage has made them better off when their unemployment rates increased from 39 percent to 50 percent since its implementation.

One well-known economist in the Obama administration said the stimulus package has created 30,000 jobs. Really? Are they permanent ones? Do they offset the job loss just in the month of August, where large businesses laid off 60,000 workers, medium-sized businesses cut 116,000 jobs and small businesses cut 122,000 jobs?

I know the Obama administration has brought back the Jimmy Carter idea of a $3,000 tax credit to create jobs. But it is doubtful that this will have any impact since the tax credit is only $3,000 for the first year and disappears after the third year. If businesses hire, it will be mainly temporary workers until it is certain that the recovery has some permanence.

So what is to be done? First, the administration should acknowledge that the engine of job creation lies in small business. Small businesses employ 48 million people. Medium-sized businesses employ 42 million and large businesses employ only 17 million. Yet the administration seems to favor large businesses over smaller enterprises.

If the problem is uncertainty, then the administration should remove the uncertain future burdens inherent in its proposals. It should remove some of the costly burdens on business - especially small businesses - from the health care legislation. It should kill cap-and-trade. It should repeal minimum wages. It should keep the Bush tax cuts and not raise marginal personal tax rates. It should drastically cut the payroll tax. Then we will see a strong recovery along with declines in the unemployment rate.

Dr. Harold Black is the James F. Smith Jr. Professor of Finance at the University of Tennessee. He can be reached at hblack@utk.edu.

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What in the world is the Fed doing?

Coupled with the pay czar Ken Feinberg's capping executive pay at TARP banks at $500,000 the Fed has weighed in with its own pay plans. The Fed says that it is within its rule-making authority to review and regulate pay packages that threaten the solvency of those it regulates. Although many will say that the Fed is overstepping its authority, in the past the courts have granted it wide latitude in its rule making. This is not unprecedented. When I was at the National Credit Union Administration, we forced some credit unions that based their incentive pay on growth in size to alter those incentives. Naturally, such a package would encourage growth in size which may also encourage increased risk taking. Thus, so long as the Fed adheres to evaluating plans and their impact on risk, I have no problem with what the Fed is doing. Note I did not say that the Fed should determine the salaries. I did not say that the Fed should cap salaries. Those are beyond the purview of the Fed because the Fed does not have a clue as to what those salaries should be. However, I actually believe that all of this is just the Fed showboating. Bernanke has been nominated but will not be confirmed until January. Research has shown that the Fed generally accommodates the administration until the chairman is reconfirmed by the Senate. Since the president hates profits (just listen to his words) and thinks executives are overpaid (again listen to his words) then the Bernanke is going to do all that he can to show he is one of the team - until he is confirmed. Then I expect him to do what all Fed chairmen have done under the same circumstances. That is grow a set, become independent, do what really is best for the economy and hope for a one term president.

Professor Bashing 101

One of the favorite mantras of talk radio is the influence of left wing university professors on the youth of America. Don't believe it. I am in my 40th year of university teaching. What I have found teaching at big public institutions in the south and small liberal colleges in the north is that students are almost always more conservative than the professors. Now I am a laissez-faire free market economist. That means I am a conservative in that the market solutions are in general more optimal than those imposed by the government. I teach this. I live it. I use supply and demand as solutions to most economic and financial problems. You would think that in an environment where most of my colleagues are white and liberal, that a black conservative would find rough sledding. Nothing could be farther from the truth. I cannot point to a single instance in which my race has been an issue at the university. I do not have students complaining that I am somehow a traitor. I do not have students complaining that I am indoctrinating them. Quite the contrary. I have heard from liberal and conservative students that it is refreshing for them to hear the other side - leaving it up to them to decided where the truth lies. In my 40 years, I can only point to a handful of students who say that I changed them from liberal to conservative and I know of no students who have said that some professor converted them from conservative to liberal. Think about it. In a broader sense have those who carp on the liberalness of professors ever stop to wonder why anyone is a conservative at all? The media is liberal. The movies are liberal. Artists are liberal. Musicians are liberal. Teachers are liberal from pre-school to grad school. Virtually every influence in our society is dominated by liberals. Yet we hear that the country is mainly center-right. How could this be? If all of these do not convert us and our kids, then what real influence could professors have on our youth?

Health Care Redux

The Senate Finance Committee just passed the outline of a health care bill. The 200 page outline is not a bill as has been reported in the press but will be cobbled together with the bill out of the Dodd committee to get a "final" bill that will go to committee. There it will be cobbled with the House bill. The House bill be be one cobbled together with the three bills that have passed House committees. Got all of that? Thus, no one has a clue as to what the final final bill will look like. One thing appears certain: no "public" option. No "trigger" that will result in a "public" option. It is also certain that universal insurance coverage will not occur. It is simply too expensive. What is more likely is something like what is bankrupting Massachusetts. As I have written before, Massachusetts mandated certain levels of coverage whether you wanted it or not. If you had a policy that provided less than the mandated coverage you were taxed $1,000. Note that when the plan was passed, there was no $1,000 tax. This was added to meet shortfalls. I find it interesting that the President says that we can pass healthcare or insurance care and it not increase costs because half of the projected costs will come from cost savings. Of course no one believes that. PriceWaterhouse scored the Senate Finance outline of a bill and found that the mandates would result in increased premiums of $4,000 per household and $1,500 for singles. You know, if Obama could really deliver $500 billion in cost savings then the administration should deliver the savings now. That would receive the bipartisan support that the president craves. However, just like Massachusetts, what ever comes out of the congress will be a cost illusion with higher costs levied down the road.

Are we safe now?

Barack Obama being awarded the Nobel peace prize is akin to my giving my students A's before they have passed an exam. I stopped taking the Nobel prize seriously when it was awarded to Arafat and Carter. Giving it to Al Gore only provided confirmation that it was a political prize and not an earned one. If the president has gotten the peace prize then why do I not feel safe? As a matter of fact I feel less safe than at any time in my adult life. Our Middle East policy looks like one of appeasement. We are talking to the Iranis while they make their bomb. Obama has a 9% approval rating in Israel - who obviously don't feel safer. The Afghani policy is confusing at best. Are we staying in force, staying put, pulling back, leaving? We appear weak to the North Koreans. Obama will meet with our adversaries but shuns the Dali Lama. The Iranis are found to have a new nuclear facility but instead of announcing it in his speech at the UN, Obama waits a day and announces it in Pittsburgh at the G20. We turn our backs on the Poles and the Czechs and coddle the Russians. We are letting Gitmo radicals loose on the world. We seem to be employing Clinton's policy of treating terrorism as a crime. That got us the Cole, the Colbart Towers, the bombing of the African embassies and the twin towers. The world all of a sudden seems to be a more dangerous place because our president seems to be relying on his charm and little else. Maybe we will be safer because of personal smiling diplomacy. I certainly may be wrong - and I hope I am but our charming president seems more and more like Neville Chamberlain.

In Defense of Capitalism

A couple of weeks ago I was asked to go on a local talk radio show to defend capitalism. It seems that with Michael Moore's movie and all the charges of reckless greed on Wall Street, capitalism is under attack. However, citing Bernie Madoff and the collapse in the financial markets as reasons to dump capitalism is a bit extreme. It is akin to condemning all mankind because of the actions of despots such as Stalin and Mao. By the way, I was pleased to see that Moore's movie opened to "disappointing ticket sales." It was probably because folks showed up at the theater expecting free admission or just making a contribution according to their means. After all isn't it ironic that capitalism has made Moore rich while he whines about it all the way to the bank? Obviously his public is a bunch of idiots. Well back to capitalism. As I told the host recall that when a Russian prime minister came to the US and was taken to a Baskin-Robbins. He was flustered. He said that this was the reason why capitalism would fail. It was wasteful to produce 44 flavors of ice cream when chocolate, vanilla and strawberry would suffice. Au contraire. He doesn't realize that it is the strength of capitalism to provide a supply if the demand for the product is profitable. It on the other hand is wasteful to produce a product that sits on the shelves unsold - something the Russians are intimately familiar with. If I were the dictator, only chocolate chocolate chip ice cream would be produced and there would be no light beer - only stouts and porters. Why? Because that is my taste. There would be no need for any others. However, I can no longer find chocolate chocolate chip in my local stores. I guess the demand wasn't there. You see the difference in capitalism and socialism is that in capitalism, the tastes of many are imposed on the few while in socialism, the tastes of the few are imposed on the many. Finally, all this reminds me of what Milton Friedman said when asked why socialism attracted so many intellectuals. His response was that the tendency of the intellectual is to think his tastes are superior to others and the desire to impose them on others is what attracts the intellectual to the left. Finally, I said that perhaps the best indicator of how well a system performs is the economic wellbeing of its poor. In America, the poor on average would be middle class in Europe. Robert Rector of the Heritage Foundation is a leading expert on this issue and shows how well off are America's poor. Everything is relative. It is only because of the comparison with the nonpoor that America's poor seem impoverished. But given their true income and assets, they are only poor here. A few years ago I had a black student come to class wearing a t-shirt with a person in chains. The caption was "I did not ask to be brought here." I said to her "Aren't you glad you were?" Her response was "Hell yes!" Enough said. Capitalism triumphs.

Happy Anniversary

October 3 is the first anniversary of TARP - the Troubled Asset Relief Program. You recall that the original intent of the bill was to purchase troubled assets from financial institutions to restore confidence in the credit markets. I had written when the act was proposed that it was doomed to fail. What was the price for the assets purchased? If purchased at market value, then it would do the institutions little good because it would still leave their balance sheets impaired. If purchased at a premium then the Feds would be stuck with an instantly underwater asset. In any event, it escaped me how all of this was to restore confidence. Of course, even the government soon realized the folly of its ways and quickly modified the implementation of the act - much to the chagrin of some legislators - to inject capital instead into failing institutions. I was actually ok with this if the capital was in the form of preferred stock. I favored the use of cumulative preferred where dividends were "guaranteed". If not paid then there would be an arrearage where the missed preferred stock dividends would all be paid prior to any payments to common stockholders. Of course, preferred stockholders do not have a vote or a direct say which seemed appropriate for the federal government. However, I was not surprised when the Feds decided to purchase common stock instead which gave this government entre into the decision making process at the largest financial institutions in the country. The president insists that he does not want to run the banks, he does not want to run the automobile industry and he does not want to run the insurance industry. Really? Then why is he? Have you heard a definitive exit strategy from the president? Neither have I.