Sunday, March 31, 2013

Elizabeth Warren: Too loose a cannon to be really dangerous

A couple of years ago I was working as an expert in a fairly high profiled banking case - we won. During that same time Harvard law professor, Elizabeth Warren was making the news pushing for a consumer protection finance agency. She won despite spouting generalities and mistruths. I was predictable critical but the lawyer that I worked with most closely on the case told me that when he was in law school, Warren was his best professor. He called her brilliant - if ignorant with regard to business and economics. Much like it was reputed that Einstein gave up studying economics because it was too hard and studied physics instead, Warren opted for the law. You may also remember that Elizabeth Warren was the source of Obama's ill-fated "You didn't build that" comment. Well the same Elizabeth Warren is now in the senate having defeated Scott Brown in Massachusetts. She recently made headlines advocating a tripling of the minimum wage to $22 an hour, pooh-poohing Obama's proposal to raise it to $10.10. Virtually all economists regardless of stripe recognize such a proposal as foolish and ignorant. However, there are those who support such a move. First, one would think that the few workers who work at the minimum wage would of course realize that such a move would lead to their being unemployed but not to worry, the intellectuals who make much more than the minimum are all for it. Consider the following: "Imagine the shock to the system $22.00 an hour would be to an employee. An immediate effect would be a reduction in two-income, lower income households. A single wage could afford the same lifestyle currently enjoyed by two people working three minimum wage jobs, even accounting for the inflationary reaction. This would relieve unemployment pressure across the board. In addition, it would create an improvement in the government budget, reducing pressure on programs such as Medicaid and Food Stamps, while also bringing in far higher tax revenue. It is a win-win scenario." No I did not make this up. It is from and is too stupid to comment on.

Friday, March 8, 2013

So who is the welfare queen?

Many of the conservatives that I know believe that the welfare state exists to keep the poor beholden to the government. There is the image of the welfare queen, not working, eating bon bons, while pumping out kids. In return, the indigent is looked up as unmotivated – and in many cases lazy – and will vote to keep themselves on the dole. However, that raises several questions. The first is whether the poor vote in such numbers that would keep a party in power. Studying voter turnout it is not surprising that as income rises, so does voter turnout. In the lowest 20th percentile only 36 percent of eligible voters vote while in the next 20th percentile 52 percent vote. Voter turnout is also related to education. Those with no high school vote at 38 percent while college graduates vote at 79 percent. Race is also a factor with 56 percent of whites, 50 percent of blacks and only 27 percent of latinos voting. Age is a factor as is marital status. Therefore, when one looks at the likelihood of being poor – single, minority, uneducated – one is looking at the least likely group to vote. This is ironic since you would think that this would be the most likely group to vote if they are dependent upon the government’s largest. Indeed, since the bottom 50 percent of income earners in this country pay only 2.25 percent of federal income taxes, for the poorest of citizens it is a negative tax – that is they receive more in benefits than they pay in taxes. Again, more the reason to vote to keep the dole coming in. But the facts say that the poor are not so motivated that they go to the polls and vote. Rather voters are the nonpoor, the educated and mostly white (so far). When you look at party affiliation by income in 2012. For low income, 34 percent were democrats, 16 percent republican and 51 percent other. For middle income, democrats were 33 percent, republicans were 28 percent and independents were 40 percent. For high income where the folklore would think the republicans dominate, it was 31 percent republican, 31 percent democrat and 38 percent other. So one would have to conclude that nonpoor, educated whites have their reasons for keeping the welfare state intact. As a matter of fact, more welfare goes to the nonpoor than to the poor. We have education subsidies that have always been a disproportionate income transfer to the nonpoor from the nonpoor. The wealthy receive tax earmarks and deductions favored by both political parties. There are tax writeoffs on second homes, on yachts, business expenses, electric vehicle credits and huge agricultural subsidies for wealthy farmers. There are all sorts of business deductions and subsidies as well. In the bill signed by President Obama to avert the fiscal cliff there were accelerated tax write-offs for owners of NASCAR race tracks and a tax credit for companies operating in American Samoa. Distillers had a rum rebate. There were tax breaks for companies on indian reservations and more aid to the railroads. Certainly, in a capitalist laissez-faire economy none of this would happen because it distorts the market, limits competition and raises prices. In total the government spent $92 billion on corporate subsidies and about $52 billion on traditional social welfare programs. Of course as I have noted, for the social welfare recipients, it is a net gain. But what about for the nonpoor? Although I do not have the precise numbers, I suspect for the middle class who only get the mortgage deduction, there is a net income loss – although they might benefit from corporate welfare going to their employers. For the very wealthy who pay the bulk of the federal taxes, the arithmetic says that it is also a net loss. Regardless, welfare should be thought of in a broader sense than just some indictment of the poor. It is an indictment on us all, raising the cost of government, distorting markets and ultimately and ironically resulting in a net loss to society.

Sunday, March 3, 2013

Dangerous consequences of quantitative easing

Knoxville News-Sentinel March 3, 2013 Increased deficits lead to increased debt. If financed by the Federal Reserve, it leads to increased money supply, a fall in bond interest rates, cheaper debt, decreased value of the dollar, currency wars, trade barriers, recession, increased inflationary fears, asset bubbles, recession. Simple isn’t it? The Federal Reserve through its QE1, QE2 and QE Infinity has given the federal government an unlimited budget. The government is politically constrained in its ability to raise taxes to finance its irresponsible deficits and is also limited in its sales of Treasury securities to the public. Sooner or later the public has enough Treasuries in its portfolios. However, the Fed has purchased $3 trillion of government securities, allowing the government to keep spending. Thus, the deficit continues to grow as well as the national debt. Moreover, the increased buying of securities causes their prices to rise and their yields to fall as well as increases the money supply. There are several consequences to this action. The first is truly ironic. With the rates on Treasuries low, the cost of borrowing by the government is low as well. This leads to the absurdity that the president can claim in the State of the Union address that there is $500 billion in interest savings, which leads to deficit reduction! Yes. He is saying that an increase in the deficit leads to a decrease in the deficit. The Fed’s policy of quantitative easing by increasing the supply of dollars results in a fall in its value. As the U.S. debt has grown the value of the dollar has shrunk. This is a key point: As a country’s debt increases, devaluation of its currency becomes more attractive because it makes its debt cheaper to service. Not surprisingly, governments throughout the world were not pleased. The Brazilian finance minister accused the U.S. of engaging in unfair trade practices since Brazilian exports to the U.S. were made more expensive and U.S. imports to Brazil cheaper. Of course he was right. Indeed, some have said that the Fed’s actions deliberately were intended to boost U.S. exports and decrease imports in an effort to lessen the impact of the recession on the U.S. Other governments, in particular Japan, have devalued their currencies also in efforts to try to spur growth. It is no coincidence that Japan’s debt is over 230 percent of its gross domestic product. This has led to a concern of “currency wars” as countries seek to protect themselves from adverse moves in their trading partners’ currencies. One real danger is that currency wars have in the past triggered trade protection measures that have led to global recessions. Another real danger is the creation of asset bubbles. Right now, as investors move away from low yielding financial assets and seek protection from the inflationary pressures of increased money supplies, the prices of real assets begin to rise. Thus, the stage is set for another bursting of asset bubbles leading to yet another severe recession. Although Fed chairman Ben Bernanke’s term as chairman of the Fed ends in a couple of years, there is no solace in knowing that his likely successor is vice chair Janet Yellen, who said in a recent speech that the Fed’s actions are “a policy that is not only good for output and employment and American workers, but also for the federal finances overall.” Heaven help us all. Get Copyright Permissions © 2013, Knoxville News Sentinel Co.