Happy Holidays and so long for now

It has been and interesting and challenging year. After the election I decided to take a break and in that time have not looked at one newscast, have not listened to talk radio and have read only the Wall Street Journal. My academic career officially ended last week with the final paper being accepted for publication by a top 10 journal. What was especially satisfying it was coauthored with my closest friend in academics Bob Schweitzer who lost his battle with bladder cancer. Bob would not have wanted a more fitting tribute to a great career. All in all I have not missed academics and have embraced retirement. At first I was concerned that since I have enjoyed every minute and every aspect of my professional life, I wondered whether it constituted such a vital part of me that I would be somewhat diminished without it. Boy was I wrong. I now had time to devote to all of my other interests and those close to me tell me that I have become somewhat more humanized. Its interesting what a step back from a life full of "let's see how good I am" can be. From the first challenge of having a genius brother (one of the three geniuses I have known) to going to the University of Georgia (where those in the same class at first thought I was only there because the courts had ordered the university to admit blacks the year before) to a phd program where every day was a thrilling excursion and where I no longer felt I was the smartest person in the room to a professional life where I succeeded more than my wildest dreams. All in all I would not trade my life or my vita for anyone else's. As can be discerned from the lack of postings to the blog, I also took a break from blogging. It wasn't that the ideas had stopped it was just that as I decompressed the blog became less and less important to me. So I have decided to officially shut it down as well. I would like to thank all who have honored me by reading it, by making comments and even referring others to it. I cannot thank you enough but it is time to move on to other things. I hope you all have a wonderful holiday season and a happy and prosperous new year.

Neither side serious in fiscal debate

The following appeared on November 4 in the Knoxville News-Sentinel In financial markets the interest rate on Treasurys is considered the "risk free" rate where "risk free" refers to risk of default and not interest rate risk. This means that the debt obligations of the US government can - like any other financial instrument - change in value as market conditions change. If demand and supply conditions cause the interest rates of the securities to move, then their prices will move in the opposite direction. This is interest rate risk. However, the securities issued by the US government are said to be free from default risk because the government can always pay its debts. It can issue more debt and use the proceeds to pay current obligations or create money to pay off those obligations. In the case of issuing more debt, why would a rational person or institution buy the bonds of a bankrupt institution teetering on default? The answer is that most would not, especially if the likelihood exists for repayment in inflated dollars. However, the government could buy the bonds it issues and use the proceeds to pay off current obligations. That is the Treasury could sell its bonds to Social Security (the largest holder) or to Medicare (9th largest holder) or to the Federal Reserve (the second largest holder). Interestingly enough, in the budget debate there has been no consideration of banning Treasury sales to other federal entities. Yet without doing so there is no fiscal discipline - other than the debt ceiling - to inhibit the government from continuing to spend out of control. In a macro sense, given the size of the budget and tax inflows, the government needs to borrow an additional 25 percent to make ends meet and this difference will continue to grow as entitlements grow. If there is a shortfall, the Treasury can decide who to pay and who not to pay. It could pay all the principal and interest owed on the debt, social security, medicare and the military and then decide to default on other obligations. This is highly unlikely given our political climate. Indeed, when both the republicans and the democrats announced that the 800,000 federal workers who had be furloughed in the latest "shutdown" would receive all back pay and benefits - in essence a paid vacation - I knew that neither side was really serious about addressing the problem. That was confirmed when we got a budget deal reinstating government spending without a cap until January 15, 2014 and allowing the debt ceiling to rise until February 7. Thus, the proverbial can was kicked down the road for the umpteenth time. Maybe this will give the congress and the administration time to come up with a viable solution to address the root causes of the problem but don't hold your breath since the majority of our elected officials simply do not have the will or the discipline to just say no.

Just say no: redux

I have written before that the debt ceiling is the only thing that can force fiscal discipline on the federal government. Given that government “revenues” are almost $3 trillion a year, that is more than enough to meet all interest and principal payments on the outstanding federal debt but not enough to cover all government expenditures – hence the continuing and growing deficit. The debt ceiling would force the federal government to prioritize its spending by placing a limit on its ability to continue to borrow. Of course if the debt ceiling is not raised the UA would default but is that necessarily a bad thing. Most people seem to think that a default would mean that the US would default on the interest and principal payments. But that would be a choice made by the Treasury and the president. In reality, there is more than enough to pay on the debt as promised, social security, the military and medicare. What would be missing would be the 25 percent left to pay all government workers and fund all government programs. Thus, the government would default on its obligations to its employees and not to its debt holders. In essence federal workers would be faced with what workers face in the private sector when their employers go out of business. If this is not catastrophic for the private sector then why is this catastrophic for the government? As it now stands, federal workers have been sheltered from facing the consequences stemming from a bloated government making irresponsible decisions. Of course the government will choose to shut down parts of the government that will create the most pain amongst its citizens in order to force the continuation of unlimited largesse. Nonetheless, the day of reckoning is going to come if we continue on the path that we are on. I consider this more irresponsible that the termination of unnecessary spending and growth of the size of the government. I wrote before that the congress should just say "no". I reiterate that plea.

More Ted Cruz and Mike Lee and Less Bob Corker Please

You have probably heard that Ted Cruz and Mike Lee were attacked by some of their republican colleagues in a closed door session over their opposition to Obamacare. The reason you probably heard this is because someone at the meeting leaked the happenings to the press. I give you odds that the leaker was probably Bob Corker. Corker has proven to be no friend of conservatives. He appears to be enamored of his own voice and puts himself before every camera available. I for one am tired of seeing his face in the press and on TV and reading his pious quotes. Since he has been in the senate he has abandoned the principles on which he was elected in favor of “compromise”. He is now the darling of the media and it looks as if he is jockeying to be Obama’s favorite republican senator. Of course there are some here in Tennessee that would argue that Lamar Alexander has that distinction. Once upon a time I wrote that West Virginia had the nation’s worse senators with Jay Rockefeller and KKK Robert Byrd. However, I am beginning to think that Tennessee’s senators are vying for that honor. Kudos to Cruz and Lee for fighting the good fight. By themselves they could not have caused the government “slimdown”. However they are the ones vilified for it. By the way, Have you missed the government? TSA is still at the airports. The off budget agencies are still regulating. The only indicators of the “slimdown” are the shutting down of government websites – how much is the cost of their maintenance – and the silly barricading of government monuments and park closures – obviously intended to just make us mad. So go on with your bad selves Ted Cruz and Mike Lee. I wish you were my senators.

What? No Drunken Red Savages?

The usual suspects among the sports columnists are on the warpath again demanding that the Washington Redskins change their name. No matter that the owner Daniel Synder says that it will never happen as long as he owns the team and that polls taken show that the fans overwhelmingly want the name to stay the same. Finally one ESPN columnist Rick Rielly went against the stream of his fellows and published a column saying did anyone ask the Indians? http://espn.go.com/nfl/story/_/id/9689220/redskins-name-change-not-easy-sounds. Since Synder owns the team there is nothing that the NFL can do to force a change. This is unlike the NCAA which in 2005 issued an edict saying that any school using indian logos or nicknames would be banned from postseason play forcing many schools to change their names. Perhaps the biggest stink was the case of the University of North Dakota Fighting Sioux who were forced into submission because primarily of the prominence of their hockey team - although ironically their logo was designed by a Native American. The North Dakota legislature forbade the adoption of a new mascot or logo until 2015 so as of today they are the University of North Dakota ----------. When the NCAA whose hierarchy is made up of middle aged white men decided that the indian symbols were offensive, several schools notably Florida State (Seminoles) went ballistic. Other schools that had large Native American populations that had indian symbols such as University of North Carolina - Pembroke were granted exemptions. But isn't it ironic (Reilly also points this out) that many schools with Native American students called themselves Redskins, Braves and Savages? The last time I looked, the NCAA must have blinked. Some schools changed prior to the ban (Stanford Indians/Cardinal, Marquette Warriors/Golden Eagles, St John Redmen/Red Storm) while others changed because of it Arkansas State Indians/Red Wolves, Louisiana-Monroe Indians/Warhawks , Newberry Indians/Wolves and Carthage College morphed from the Redmen to the Red Men and their women's teams are the Lady Reds. But Catawba is still the indians, Illinois is still the Fighting Illini, Utah is still the Utes, Central Michigan is still the Chippawas, Alcorn is still the Braves and of course Florida State is still the Seminoles. What is interesting is that all the nicknames connote bravery and stature (Chiefs) rather than scorn and derision. Yes the Atlanta Braves once had a tepee in the outfield and a mascot named Chief Nok-a-homa who did a war dance every time a Brave hit a home run. They also had a laughing indian on their sleeves. But all that is gone leaving only the laughing gap-toothed indian logo of the Cleveland Indians - which even I find offensive. Nevertheless, the baseball team that preceded the Braves were a minor league team called the Atlanta Crackers. So why weren't white folks offended? What is hilarious is that the Negro league team was known as the Black Crackers. Isn't it interesting that the same columnists who have stood up for the indians have been silent on the name Rebels? Of course all the confederate symbols have gone now. When I went to the University of Georgia, the band was the Dixie Redcoat Marching band and played Dixie after the National Anthem and most of the crowd waved confederate flags. All the tailgaters flew rebel flags. But it was worse at Ole Miss. I even turned down an interview for a deanship at Ole Miss because of all the rebel nonsense. However, all that stuff is gone. I went to the Georgia/South Carolina game and saw not one rebel flag. Ole Miss' football and basketball teams are mostly black. My feeling is that if they aren't bothered by being called "Rebels" then why should I be offended for them?

No more Freeway of Love?

The Associated Press recently had a story on how America has appeared to have lost its love affair with the automobile. The article by Joan Lowry entitled "Less driving as car culture wanes" (http://kdhnews.com/business/less-driving-as-car-culture-wanes/article_ae9e58d6-11b5-11e3-bb5e-001a4bcf6878.html?mode=jqm) notes that the collective miles driven by Americans peaked in 2007 and has declined each year since. Also most notably the percent of teens and young adults with drivers licenses has dropped. What are the reasons why? Lowry mentions the obvious ones: the bad economy, terrible commutes from the suburbs and headaches of car ownership in the cities. Lowry also mentions modern reasons such as shopping online and an uptick in walking and biking to work. Now I doubt whether walking and biking to work have made a serious impact on the statistics. However, she does not give the reasons that are obvious to me. Cars have been neutered and are just no fun anymore. I recently drove 4 hours and did not see a single vehicle that I wanted to own. It used to be different with mainstream America and its Mustangs, GTOs, Corvettes, MGBs, TR3s, and other wonderful cars. Now most what you see are minivans (and pickups here in Tennessee). I was also struck by the volume of wimpy cars that looked like cars with the backend chopped off with lawnmower engines. Isn't it apparent that high gas prices, high insurance rates, fleet milage regulations and the emasculation of the American male have all worked to eliminate the fun from driving? As I wrote in this space back in 2009, that the love affair has been lost is evident from the music (http://haroldblack.blogspot.com/2009/06/im-kickin-in-my-red-prius.html) Gone are the songs rhapsodizing the automobile. Who would profess (other than a nerd) love for the vast majority of today's automobile?

Bernanke's Fed Policy Did More Harm than Good

This article appeared in the Knoxville News-Sentinel September 1, 2013 The Kansas City Fed’s annual meeting in Jackson Hole, WY has evolved from inviting me and other pedestrian regulators and economists to being a who’s who concave of Ivy League economists and central bankers. Instead of presenting esoteric academic papers, the conference now features a few papers on a particular theme and then discussions by central bankers on how they are saving the world. This year’s conference was about the legacy of Ben Bernanke although he chose not to attend. As can be imagined that legacy is controversial outside the world of central bankers. It is called unconventional monetary policy. While conventional monetary policy features manipulation of the fed funds rate and monetary aggregates like the money supply and monetary base, unconventional monetary policy revolves around large scale asset purchases. The Bernanke Fed initiated this policy with the establishment of specialized lending facilities early in the recession and lending to nonbanks and foreign banks. Gradually, the Fed wound down the special lending facilities and then concentrated on asset purchases inflating its balance sheet to around $3 trillion by year end 2012. Currently, the Fed is purchasing around $40 billion in mortgage backed securities and $45 billion in Treasurys per month. At Jackson Hole, Christine Lagarde, the managing director of the International Monetary Fund, said that Bernanke and other central bankers had prevented a severe depression through unconventional monetary policy. She said that the policy was a clear success and the world’s central bankers should continue such policy. However Lagarde did not mention that such policy made the recovery from recession the weakest in history. The central bankers also did not dwell on the fact that such a policy has made it difficult to unwind. Indeed, the mere mention of the possibility by Bernanke sent the stock market into a tizzy. However, the fact remains that research indicates that the Fed’s policy has created market distortions, market volatility and asset bubbles that could lead to another serious downturn. In fact a paper at the Federal Reserve Bank of St. Louis concludes that the Fed’s term auction facility which was a program designed to lessen the spread between short term bank borrowing rates and equivalent Treasury rates (risk premium) actually increased the rates because it signaled to the market that the financial crisis was actually worse than the market had thought. At Jackson Hole a paper was presented by Northwestern University’s Arvind Krishnamurthy that the Fed’s purchases of mortgage backed securities had more of an economic impact than did the purchasing of Treasurys. Indeed Krishnamurthy finds that Fed purchases had little economic benefit. Perhaps not ironically, the purchasing of Treasurys did benefit the Administration in that it allowed increased deficit spending as the Fed financed the government’s deficit spending.

Just say no

January 15 is Martin Luther King, Jr.'s birthday (and my son's as well as the anniversary of the first Super Bowl). I have been asked to keynote the celebration at the University of Tennessee as well as UT's observance of 50 years of desegregation. I have also been asked to speak at my alma mater's celebration at the University of Georgia. Speaking at Georgia is appropriate since I am that university's first black male freshman. I came late to appreciating Martin Luther King. Having grown up in that era and participating in its events, I looked upon King as just another civil rights leader. It was only when I read Taylor Branch's Parting the Waters did I began to grasp the singular importance of King. I had always wondered why the civil rights movement did not turn into an armed conflict. In the south, we all had guns so why didn't we use them? It was the power of King's personality and his devotion to Ghandi's nonviolence that resulted in blacks turning the other cheek and letting the spectacle of white violence shift national public opinion. In that spirit, I would like to see the same type of nonviolent protest on government mandated healthcare. To date 35 state legislatures have either passed resolutions or laws banning federal mandated healthcare. Also a judge in Virginia has ruled it unconstitutional. Moreover, AGs from 21 states have filed suit against the federal government over this provision. Polls show that the majority of Americans oppose the mandate. But what if the Supreme Court rules it is constitutional? Then I propose that we Americans just say no. Although we are law biding citizens, it does not necessarily follow that we must obey the law blindly. What if we opted not to buy the insurance and do so on a nationwide basis? Could the federal government dare enforce it? I think not. It would be helpful if the republicans in congress would also encourage massive civil disobedience. If they cannot defund the legislation or repeal it, then they should help lead the public to refuse to follow the mandate. In the absence of national leadership on this issue, what is needed is the rise of another Martin Luther King, Jr. to lead the way in just saying no.

Alas Poor Detroit

Detroit is a mess. After an unsuccessful attempt at filing bankruptcy, the city now has court approval to proceed. Detroit owes about $20 billion to over 100,000 creditors resulting in what could charitably be called a mess. However, besides the city employees and those on pensions one wonders who would be crazy enough to extend credit to the city. The answer is not many. The Wall Street Journal reports that there are only $530 million in general obligation bonds. The vast majority of the unsecured debt being $10 billion owed to retirees. However, why are general obligation bonds unsecured debt? True there is no collateral pledged against the bonds, but GOs are secured by the taxing power of the issuer. Therefore, if GOs are allowed to be classified as unsecured, then there may be higher borrowing costs to other municipalities throughout the country. On a more personal note, what is sad about the slow and steady demise of Detroit is not that its current mayor was one of my favorite basketball players - Dave Bing - but it is home of so many of my relatives from Gray, Ga. We have even had family reunions in Detroit. My mother once remarked that most of her family left Gray to take jobs in the automobile factories. Since relative few blacks were drafted during World War II, incredible opportunities opened up to them as they replaced the white workers who went into the service. One of my favorite books is The Promised Land by Nicholas Lemann which documents the great black migration from the south during those years. Highly recommended. Mother used to say that her father was ridiculed for not selling his land and staying in Gray. Their relatives would come visit every year driving fancy cars, wearing expensive suits and furs. They sent their children to Michigan and Michigan State rather than to Fort Valley State or Savannah State in Georgia and looked down their noses at their country cousins. Mom said that my grandfather finally gave in and moved up to Detroit one spring. He returned in less than a month shaking his head with disbelief after finding that there was no place for him to hunt rabbits. If there were, I would not be here for my mother would likely have not met my Dad. one a more somber note, if I were a city employee of any municipality I would be agitating for privatization of the city pension, retirement and health plans to protect myself against any potential bankruptcy filing. City plans are usually defined benefit plans and almost without exception are seriously underfunded. The promises made by these plans result in shortfalls than can never can be fulfilled leaving the states or the federal government to step in and fill the breach. Although I hope that this does not occur because it would encourage even more profligate spending by the cities, I do have feelings for the pensioners in Detroit who now face a very frightening future.

After Ben

Ben Bernanke’s current term as a governor of the Federal Reserve expires in January 2014. Currently he is in his second term as Chairman, having been appointed by President Bush in 2006 and reappointed by President Obama in 2010. However, his term as governor is for 14 years and does not expire until 2020. Consequently, he could serve out that term even if he did not want another four year term as chairman. However, Bernanke probably thinks that he has given enough service to the government and will return to his teaching position. One salient reason is that as chairman of the Fed he earns only $199,700 while the other governors earn $179,000. At Princeton, Bernanke would probably earn in excess of $450,00. Also he has textbook royalties of around $300,000. Add to that opportunities to join Fortune 500 boards and speaking fees, Bernanke stands to earn several million dollars a year. But what about the Fed after Ben? Rumor has it that Janet Yellen, the vice chair is the most likely candidate to succeed Bernanke. That makes sense since she left her high paying economics position at Berkeley to join the Fed then left to be president of the San Francisco Fed. Then she was appointed to be vice chair of the Fed at half the San Francisco salary. Now why would she rationally do that? –I would much rather be a Fed President than be on the Board of Governors (except for being chairman. The only reason must be that she was promised the next chairmanship. Other names prominently mentioned for the job are Larry Summers and the current chairman of the Council of Economic Advisors, Alan Krueger. What is interesting is that none of the three has an expertise in monetary economics – although Yellen lists it as an area of interest. Yellen and Krueger are primarily labor economists. Yellen does have some co-authored publications in macroeconomics but these do not constitute the bulk of her writings. Larry Summers has some academic pieces in marcroeconomics and monetary economics but mainly he too concentrates in labor markets with some dabbling in financial markets. Thus, what is interesting is that Obama will likely turn the reins of the Fed over to someone who is not a monetary economics expert. All three are likely to eschew Fed independence and like Bernanke and Greenspan before him, be an adjunct of the office of the President continuing the current policy of monetary accommodation.

Tax the Internet?

I buy quite a bit of stuff online. I also bank online. At first I was a bit trepidatious so the card I use for internet purchases is for that purpose only while my bank password is as close to random as possible. Indeed the two times my credit cards have been compromised were with cards I do not use for the internet. Tennessee’s republican governor is actively pushing for taxing the internet and has the backing of the state’s two senators. The house delegation however has not rushed to embrace the initiative. Many are saying that they would like to protect small businesses but don’t advocate an increase in taxes period. This got me thinking. The small businesses that I used to frequent that went out of business said that the big box stores, not the internet, were the culprit. The owner of my local pro archery shop said that Gander Mountain and Bass Pro could sell high-end bows cheaper than what he could buy them for and customers would come shoot his bows and then go buy them at Bass Pro. Of course you have heard the same regarding the impact of Wal-Mart on a community. The choice is cheaper or more expensive. Usually cheaper wins. The same is true with the internet. Itunes and Amazon have put the record stores out of business. Remember Tower Records? Amazon also threatens the book stores (re: Borders) and Barnes and Noble has countered with its own internet service and reader. I download all my music but not my books. I still like the physical entity in my hands. So what else do I buy online? I just bought a new microwave from Amazon. Not only did it list for $30 cheaper than at the big box stores (Sears, Walmart, Best Buy), I also got free shipping and saved $20 in sales tax. Choice? No brainer. Now I don’t think that Tennessee governor Bill Haslam particularly wants to go on record has trying to save the profits of Sears, Walmart and Best Buy so it is more fashionable to advocate raising taxes to save the small appliance dealer, bookseller or small archery pro shop. The question is whether this works as a solution to the problem of diminished sales. The obvious answer is no. I will still buy my music and books online. The microwave will still be at least $30 cheaper and the state’s coffers will swell from the increased “revenue”. Now if the governor were really concerned about small business, he would then advocate that any increase in tax receipts from internet sales would not be held by the state but would be allocated 100 percent to small businesses to compensate for revenue loss. How likely is that?

Despite sequester, federal spending will grow

Knoxville News-Sentinel May 5, 2013 When Congress adopted the president’s idea of sequestration to force a budget compromise, the word from Washington was that its implementation would be a disaster. The cut in discretionary spending amounted to $85 billion dollars. Of course this is a piddling 2.4 percent of the federal budget. Nevertheless, the White House said the cuts would “threaten hundreds of thousands of jobs, and cut vital services for children, seniors, people with mental illness, and our men and women in uniform.” It further stated “these cuts will make it harder to grow our economy and create jobs by affecting our ability to invest in important priorities like education, research and innovation, public safety, and military readiness.” Of course this White House would regard any cut in government spending as having disastrous consequences, and to that end, the sequestration was a touch of genius. Because the government has an incentive to increase spending since that increases its power, there is a total disregard for cutting the federal budget. As a consequence, the sequester was designed to inflict as much pain as possible. Logically if faced with the decision as to where to cut spending, the typical household would select those expenditures that were the least vital. On the other hand, the government’s strategy would be to cut those programs that inflict the most pain to the public. Instead of trimming staff at the White House or Congress staffers or faceless bureaucrats, instead of rigorously attacking waste, the government will make the cuts both visible and painful. Thus, the sequestration mandated across-the-board cuts, leaving the agencies little discretion in which programs to cut. Thus, the agencies cannot be blamed for inflicting pain. The first case in point was the Federal Aviation Administration furloughing its air traffic controllers for two days a month, resulting in long flight delays. Naturally there was a hue and cry from airline passengers, and Congress rushed through a fix to restructure the $600 million cut to the FAA. Note that the fix does not increase the funding to the FAA. Rather, it allows the agency discretion in where it can cut. The House vote was 361 to 41, while the Senate was unanimous in its support. This was an opportunity lost. Instead of changing the sequester law to allow all the agencies discretion in where to cut, it only gave that power to the FAA. What the air traffic controller fix does is to show the public that the sequester is nothing more than a publicity stunt. This is not a serious attempt at budget reduction; rather, Washington is taking us all for fools. As to the budget reduction touted in the press and by our politicians, despite the sequester, federal spending will grow by $15 billion this fiscal year.

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 addictinginfo.org. and is too stupid to comment on.

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.

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.

Still at War? Part 2

I had asked were we still at war since the confederacy never officially surrendered. It occurred to me that the answer is "no" simply because the Civil War was technically a police action. The north never recognized the succession by the southern states and the confederacy was not officially recognized as a country by any other country. Thus, there was no need for a formal surrender by the confederacy since technically it did not exist as a country.

Armen Alchian

There are many reasons why one becomes what one becomes. For me, it was honors principles of economics taken my sophomore year at Georgia. It was a small class taught by a legendary tough professor, Prof. William Miller. The regular sections of economics used Paul Samuelson’s now famous text. We, however, used Alchian and Allen’s University Economics. Prof. Miller was a free trade laissez-faire thinker and scoffed at Samuelson’s Keynesian economics. Alchian and Allen was the perfect text for teaching economic principles. Its free market approach applied basic supply and demand concepts to everyday problems, the political theater and international politics. It was humorous yet rigorous. It asked questions such as “what is the impact of minimum wages on poor wage earners?” While the popular knee jerk reaction – which still exists today – is raise them. Employing supply and demand yields the answer that an increase in minimum wages creates unemployment for those who work for the minimum. That example and countless others led us to apply basic economic principles and come up with answers that were definitely out of the mainstream. However, it gave us a logical basis for making decisions based on rational thought rather than raw emotions. Moreover, Dr. Miller added works by Thomas Sowell when I turned up in his class. Basically he was illustrating that free market thinking was not the sole province of whites and that its use would make us all better off. Alchian and Allen spoke to me and I became an economics major. I then when to Ohio State because one of their free market UCLA colleagues Karl Brunner had taken an endowed professorship there. I had decided I wanted to study monetary economics and wanted to write under Brunner, considered by many as the father of modern monetarism. I was fortunate enough to write under Brunner and spent my career teaching and practicing free market economics – yes even as a federal regulator. Fifty years later, I still have my copy of University Economics. It is on my list of favorite books. I owe a deep intellectual debt to Drs. Miller and Brunner but especially to Professor Armen Alchian who died on February 19th.

Still at war?

The Kingsport (TN) Times News runs on occasion a front page article on the civil war by Ned Jilton. In the Jan 29 issue (I tired to find a link but failed but found an earlier piece which is almost identical http://www.timesnews.net/blogger.php?id=10239&postid=7246) is a piece entitled "Gen. George Pickett, the man in charge". It is an excellent article on Pickett from the Mexican-American war to the incident with the pig in Oregon to the end where he was at a fish fry as his men were overrun at Five Forks. I sent him an email congratulating him on an otherwise excellent article. I said that it was mistitled since Pickett was far from "the man in charge". How could he be in charge when he was at the rear? Jilton said that being at the rear was protocol for division commanders but then why were the other commanders, Pettigrew (mortally wounded) and Trimble (wounded and captured) leading their troops? But mainly I was wondering if technically we still may be at war since I don't think the confederacy ever officially surrendered. Yes each confederate army on the field eventually surrendered and Jefferson Davis dissolved the government when he fled to Georgia but I don't think there was ever an official declaration of surrender. Was there?

Did the Germans read my blog?

The Wall Street Journal reported on Thursday January 31 that the German government will propose splitting off bank's risky activities into a separate bank. I have made that proposal often in the past in this space along with imposing 100 percent reserves on the bank that holds deposits (http://haroldblack.blogspot.com/2008/10/100-percent-reverse.html). My notion is that the fiduciary deposit taking side of the bank should not be exposed to risk taking. Moreover, the beauty of 100 percent reserves is that there is no need for the FDIC, the banks could no longer create money and there is no risk to depositors. The deposit taking bank would make money by having the Fed continue to pay interest on reserves. The risk taking bank - it could be a subsidiary in the bank holding company - would not finance its portfolio from deposits. Rather it would borrow the money, much like mutual funds do now. My idea was to have this risk taking bank also make loans as well as investments. The German proposal is an outgrowth of a proposal from Finland's central bank and is being also considered in France. So instead of the mish mash that is Dodd Frank which does precious little to address bank risk taking, such a proposal would allow banks to take risks and be regulated by the market place. It would also shield depositors from such risks since no risk taking can occur since the deposit taking entity would not make loans. Of course, the government and the regulators would oppose such a proposal here since it limits their role and reduces their power. But still, its a thought.

Minor Irritants

Since I have not yet gone back to watching or listening to the news, I look at ESPN during my morning workouts. I have then become very irritated with some commercials and give the mute button a workout too. So here are my minor irritants. 1. Manti Te'O - enough already! 2. Ray Lewis - will someone please muzzle this guy? 3. Flo – or for that matter any Progressive Insurance commercial. 4. Kids in commercials selling products to adults (Ally Bank) 5. Nationwide Insurance – “We put customers first because we don’t have shareholders.” Right. Did you know that studies in Finance show that mutual companies are more wasteful, have higher costs, more perks paid to executives than shareholder companies. In reality, Nationwide is likely really saying that the money that would go to shareholders is being put it in their own pockets. 6. GEICO commercials - Why is it that insurance companies have the dumbest commercials? 7. Weight loss commercials. The one with Terry Bradshaw and Jillian is obviously intended to show women that this particular weight loss program will not reduce their breasts. Then there is the truly bizarre one in which you drink the product and it blows up 50 times in your stomach to prevent you from eating. No I am not kidding. 8. Finally anything dealing with Facebook. I just deleted permanently my Facebook account. I never used it anyway and the only reason I signed up was I kept getting requests from friends to be “friends”. Little did I know that I was going to get notifications of how truly banal most of my friends were. I would also get messages from them and only replied via email since I did not want my responses known to the world. What was troubling was that I started getting friend requests from people I did not know and then emails with friends names on them asking me to open links. However, it was obvious that these emails did not come from anyone I knew since what was written in the subject space was obviously not in character with those people. Yes I know, the blog is also a look into my views but somehow it feels less personal and intrusive.