Economy

Let’s Lose LOST

by Iain Murray on May 16, 2012 · 0 comments

in Economy, Energy, Environment, International

The Law of the Sea Treaty would drastically undermine American sovereignty, giving massive powers to the U.N. (aka the Dictators’ Club of New York), but the Senate is actually considering passing it — get this — as a tribute to Dick Lugar, whose voters unceremoniously dumped him last week. Seriously, couldn’t they just give him a medal? This is enough to make me think the House of Lords is a good idea.

In any event, Let Freedom Ring has an action site up on this – Let’s Lose LOST.

For further background, here are two studies from CEI on the subject of LOST that we issued when the George W. Bush administration was thinking about getting it ratified to curry international favor.

Ten Thousand Commandments: An Annual Survey of the Regulatory State

by Iain Murray on May 15, 2012 · 0 comments

in Deregulate to Stimulate, Economy, Regulation

The latest edition of my colleague Wayne Crews’s annual snapshot of the regulatory state, “Ten Thousand Commandments,” is out. This year’s lowlights include:

  • Estimated regulatory costs, while “off budget,” are equivalent to over 48 percent of the level of federal spending itself.
  • The 2011 Federal Register finished at 81,247 pages, just shy of 2010’s all-time record-high 81,405 pages.
  • Regulatory compliance costs dwarf corporate-income taxes of $198 billion, and exceed individual income taxes and even pre-tax corporate profits.
  • Agencies issued 3,807 final rules in 2011, a 6.5 percent increase over 3,573 in 2010.
  • Of the 4,128 regulations in the works at year-end 2011, 212 were “economically significant,” meaning they generally wield at least $100 million in economic impact.
  • 822 of those 4,128 regulations in the works would affect small businesses.
  • The total number of economically significant rules finalized in 2011 was 79, down slightly from 2010 but up 92.7 percent over five years, and 108 percent over ten years.
  • Recent costly federal agency initiatives include the Environmental Protection Agency’s Mercury and Air Toxics Standards Rule and the Department of Transportation’s Fuel Economy Standards.
  • While some people talk about Republican tentacles, this report clearly shows how vast the Leviathan of the federal government has grown, with its massive tentacles extending into every business — and every pocket — in the nation.

Direct link to the PDF is here.

Greek Tragedy Nears a Dramatic End

by Iain Murray on May 14, 2012 · 0 comments

in Economy, International

With the prospects for a Greek pro-austerity coalition fading rapidly, here is a round-up of the most useful stories on the Greek tragedy:

  • The BBC’s business editor, Robert Peston, asks if the Euro could survive a Greek exit. His comments on German reactions are key.
  • A group of economists and financiers comment on what a Greek exit would mean. The consensus: economic disaster for Greece, but only a couple note that the Greek position right now isn’t exactly bread and roses.
  • A useful note from JP Morgan that suggests that immediate losses from a Greek Euro exit could be around $400 billion.
  • The suggestion that Greece could run out of money as early as tomorrow.
  • In a leading indicator of capital flight, Greeks, Italians. and Spaniards have flooded into the London real estate market.
  • Trading desks in London have started adding a shadow Drachma to their computer systems (and lots more in that excellent rolling blog from The Guardian).
  • Drafts from Berlin suggest that Germany wants a Europe-wide bailout fund to stabilize the European economy after a Greek exit (now being elided to “Grexit” in City of London shorthand). This would mean non-Eurozone members helping pay for the costs of the Euro.
  • Paul Krugman finally catches up to what the rest of us have been saying for some time.
  • A straw that some are clutching at is that Greeks remain committed to the Euro, ignoring the role that it has played in their crisis.
  • AEI’s James Pethokoukis points out the obvious — that a Euro recession could have significant implications for the presidential election.

For the record, here’s my two American Spectator articles on Greece, one from November last year. I wish I’d been more wrong.

Immigration and Demographic Doom

by David Bier on May 14, 2012 · 0 comments

in Economy, Features, Trade

Post image for Immigration and Demographic Doom

America — the world’s most recent great civilization — faces a demographic problem that calls for a solution from the dawn of civilization. When civilization began in ancient Sumer over 6,000 years ago, city life increased trade and wealth, but also created the perfect environment for diseases to spread. Epidemics wiped out much of the working age population, but help soon arrived. Akkadians from neighboring rural areas traveled to the Tigris and Euphrates river basin to build Sumer’s irrigation canals, roads, and other infrastructure. The first great civilization survived, not by social isolation, but thanks to a constant supply of migrant workers.

Unlike Sumer, America has so thoroughly subdued disease and prolonged death that it has produced the opposite demographic situation — an aging population supported by a shrinking workforce. America’s over-65 demographic grew three and a half times faster than the general population during the 20th century. By 2050, it will have increased from 13 percent — a historic high — to over 20 percent, according to the Census Bureau. Meanwhile, America’s fertility rate has fallen from 3.7 births per woman in 1960 to barely replacement levels at 2.05.

All this adds up to fewer workers to pay for more retirees’ public benefits. Workers per Social Security beneficiary have fallen from 42 in 1945 to under three, and it’s only going to get worse. By 2050, there will be down just two workers. According to Social Security and Medicare Trustees, the unfunded liabilities for these programs exceed $18.7 trillion over the current generation’s lifespan plus $24.4 trillion from general revenues for Medicare Parts B and D.

Fewer workers will also mean less production, which equals less economic growth and innovation. As the European Commission has concluded, “ageing populations over the coming decades at the global level will [cause] not only a slowdown in the growth rate of output and living standards but also… falling rates of capital accumulation and a slowdown in productivity growth.” This slowdown means growing public services will rest on a shrinking tax base.

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Austerity Is Mythical, But It Would Have Real Benefits

by Hans Bader on May 11, 2012 · 1 comment

in Deregulate to Stimulate, Economy, Employment

Left-leaning commentators are wrong to decry “austerity” in Europe, since, as the Richmond Times-Dispatch notes, such “austerity” is largely mythical:

European nations have not slashed spending. To the contrary, only a couple have even so much as nicked it.

According to the European Union, “National budgets are not decreasing their spending, they are increasing it.” In 2011, 23 of the EU’s 27 nations raised spending levels. This year 24 of them will.

In the past decade, aggregate spending by EU governments rose 62 percent, according to Investor’s Business Daily.

On the other hand, during some past periods of economic growth, the U.S. actually did practice austerity, cutting government spending, as a graph at The American illustrates (see this link).

As James Pethokoukis notes there, “From 1944 to 1948, Uncle Sam cut spending by a whopping 75% as World War II came to end. Spending as a share of GDP plunged to 9% in 1948 from 44% in 1944.”  “Despite cuts which dwarfed those” that “Republicans are calling for” today, “the U.S. economy thrived. There was no mass unemployment despite rapid demobilization of the armed forces.” Similarly, the economy grew in the 1990s, when federal spending was much lower than it is today: “After the Cold War ended, overall federal spending fell to 18% of GDP in 2000 from 22% in 1991. But again the economy boomed. Real U.S. GDP grew by 40% with an average annual growth rate of 3.8%.”

Government spending is not a panacea for recessions.  Herbert Hoover increased government spending in the Great Depression, both in real terms and as a percentage of the economy, but the economy failed to revive. As Megan McArdle of The Atlantic notes, government spending more than doubled as a percentage of the economy from 1929 to 1933. Although the economy temporarily revived under Roosevelt, it then went back into a nasty recession in 1937-38, the so-called Roosevelt Recession. A sustained recovery from the Depression finally occurred only after a coalition of conservative Democrats and Republicans effectively took control of Congress in 1938 and blocked (or, in one case, repealed) various anti-business measures that had been stalling a natural recovery by discouraging investment.

Why JPMorgan Chase’s Mark-to-Market Losses Don’t Bolster Case for Volcker Rule

by John Berlau on May 11, 2012 · 0 comments

in Deregulate to Stimulate, Economy, Features, Regulation

Post image for Why JPMorgan Chase’s Mark-to-Market Losses Don’t Bolster Case for Volcker Rule

There is much still to be known about the $2 billion in losses JPMorgan Chase is reporting due to a flawed hedging strategy. But this lack of knowledge hasn’t prevented proponents of Dodd-Frank’s Volcker Rule, which bans banks from certain types of trading, from jumping into the fray and claiming this as a justification for their vaunted rule to keep banks from “gambling” with trading strategies as opposed to the “safe” activities of lending.

But just as due diligence is required by banks and investors, so it is by policy makers. $2 billion is a big number that attracts a lot of headlines, but it is dwarfed by the trillions in losses from the “traditional” bank activity of mortgage lending. Yes, these mortgages were traded, but bad underwriting of unqualified borrowers – encouraged by government subsidies through Fannie Mae and Freddie Mac — and mandates through the Community Reinvestment Act — was the root of the problem.

What’s still unclear is about JP Morgan is (1) what is the extent of the actual loss as opposed to the “mark-to-market” or paper loss, and (2) would JP Morgan’s trading fall under “proprietary trading” covered by the Volcker Rule or “hedging,” which regulators recognize that banks must do to attempt to minimize risk, even though these attempts aren’t always successful.

What we do know is that it’s not just JPMorgan Chase CEO Jamie Dimon that had criticized the Volcker Rule. A host of mid-size banks as well as respected scholars have warned that it could infringe on legitimate financial activity necessary for economic recovery, such as market making of initial public offerings of stock.

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Legacy Risks

by Fred Smith on May 10, 2012 · 0 comments

in Economy, Labor, Precaution & Risk

European and American political and private institutions have made many non-sustainable retirement promises over the last 50 years. These promises cannot be kept and that reality is forcing reform. One primary reform is a shift from defined benefit to defined contribution plans. Critics argue that would shift risks from the company or agency to the individual. But is this true?

While an individual may fail to set aside enough savings for retirement or invest poorly, that is also true for a firm or government entity. The firm or agency may have the resources to make up for a shortfall — but they may not. When firms and — increasingly — political jurisdictions go broke, they leave workers badly shortchanged. In the private sector, the federal Pension Benefit Guarantee Corporation caps benefit payouts for pensions it takes over. And around the country, financially strapped state and local governments are enacting reforms to lower their pension liabilities. In a still-struggling economy where bankruptcies are likely to increase, defined contribution plan that are independent of the resources of a larger entity may often be the less risky option.

Note that in Europe, to avoid crippling taxes during high-tax periods, part of workers’ compensation would be in kind, often in the form of a car or even an apartment. While these were nice perks, their being provided by the employer meant that to lose one’s job meant losjng not just income, but also access to critical necessities of life. The European nations that have better weathered the Great Recession are those that have liberalized their labor markets. Those reforms allowed workers in those countries to receive higher pay and gain these resources more securely themselves. Isn’t the same principle at work in the retirement area?

Intellectuals Are the Shoeshine Boys of the Ruling Elite

by Ivan Osorio on May 10, 2012 · 2 comments

in Culture, Economy, Features, Regulation

Post image for Intellectuals Are the Shoeshine Boys of the Ruling Elite

“Why do so many intellectuals lean politically to the left?”  CEI President Fred Smith has written extensively on that question. In today’s Wall Street Journal, Harvard economics professor Robert Barro makes a contribution to this conversation. Focusing on the ongoing austerity vs. stimulus debate, he remarks upon the persistence of Keynesian policy prescriptions, despite their sorry history.

Despite the lack of evidence, it is remarkable how much allegiance the Keynesian approach receives from policy makers and economists. I think it’s because the Keynesian model addresses important macroeconomic policy issues and is pedagogically beautiful, no doubt reflecting the genius of Keynes. The basic model — government steps in to spend when others won’t — can be presented readily to one’s mother, who is then likely to buy the conclusions.

Also likely to buy the conclusions are politicians seeking scientific-sounding schemes to engineer the economy. That helps to perpetuate the fatal conceit — among intellectuals that they could plan society and among politicians that they could effectively implement those plans. Thus, as Fred noted in 2010, “Intellectuals benefit psychologically and economically from the growth of the state — statism becomes the class interest of intellectuals!”

F. A. Hayek famously said that, “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” It’s no wonder that task is so difficult both political and academic elites find expansion of the state in their class interest.

Madison, Wisconsin’s Killdozer came closer to the truth than they probably realized when they chose the title of the first album.

For more on Hayek and the fatal conceit, see Fred’s recent article in Economic Affairs.

Amendments That Take Away Rights

by Hans Bader on May 9, 2012 · 1 comment

in Economy, Legal, Personal Liberty, Politics as Usual, Property Rights, Zeitgeist

The Supreme Court, like European courts, has long recognized that corporations have constitutional rights, ever since its 6-to-1 decision in Dartmouth College v. Woodward (1819). But left-wing ideologues have falsely claimed that corporate constitutional rights are a recent invention by right-wing Supreme Court justices, in response to the Supreme Court’s 2010 ruling in Citizens United v. Federal Election Commission, which ruled that corporations and unions have the right to criticize politicians even when doing so involves spending money (that case involved a non-profit ideological corporation that wanted to air a film critical of Hillary Clinton and to advertise the film during television broadcasts. In response, the government argued that it could not only restrict such paid expression, but also restrict even books critical of politicians during an election campaign).

Although the Citizens United decision did not say that corporations are “people,” some of its critics have claimed that it did, and they have drafted something called the “People’s Rights Amendment,” which would permit the government not only to censor corporate speech, but also to seize and nationalize corporate property without compensation, under the theory that corporations are not people and thus have no constitutional rights at all. (The People’s Rights Amendment takes away the rights of non-profit corporations, which include most churches, colleges, charities, political parties, and campaign committees. Most newspapers, magazines, and broadcasters today are corporations, unlike back in 1789, when the press was not incorporated.)

Amazingly, three state legislatures — Vermont, Hawaii, and New Mexico — have passed resolutions in support of the People’s Rights Amendment, which is worthy of a Communist People’s Republic. And 28 members of the House of Representatives (all but one of them liberals) are sponsoring the People’s Rights Amendment in Congress. (Citizens United was not even the first Supreme Court decision to rule in favor of a corporation’s challenge to a speech restriction. Earlier cases like First National Bank of Boston v. Bellotti had done so, without controversy.)

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Republican Space Socialism Update

by Rand Simberg on May 9, 2012 · 6 comments

in Deregulate to Stimulate, Space

Last time we checked in on this topic, House Appropriations Chairman Frank Wolf (R-Virginia) was decrying the wastefulness of competition. Well, he’s still at it.

A couple weeks ago, the draft report language for the appropriations bill that includes NASA demanded both a reduction in that pesky competition and a return to the traditional acquisition process, rather than the cooperative use of Space Act Agreements that involves private investment:

Commercial crew.—The Committee supports the goal of achieving independent and redundant access to the International Space Station (ISS) but remains concerned about many aspects of NASA’s approach to the commercial crew development program. First, the Committee believes that the program’s total estimated development costs of $4,868,000,000 are too high given that the current commitment to the ISS leaves NASA with only a few years to make use of commercial crew services and no sufficient additional market has been clearly demonstrated in the absence of NASA as a base customer.

Second, the current structure of the program has insufficient safeguards in place to protect the government’s interests in intellectual or physical property developed with Federal money in the event that companies are terminated from or opt to leave the program. As such, there is a risk of repeating the government’s experience from last year’s bankruptcy of the solar energy firm Solyndra, in which the failure of a high risk, government subsidized development venture left taxpayers with no tangible benefit in exchange for their substantial investment.

Third, the Administration appears to be pursuing potentially inconsistent goals for the program: (1) the achievement of the fastest, safest, most cost effective means of domestic access to the ISS, and (2) the ‘‘seeding’’ of a new commercial spaceflight industry. Given the overwhelming importance of the first of these goals, any funding, time and effort expended in pursuit of the second is potentially a distraction from other necessary work, and, in an environment of fiscal constraint, a dilution of limited resources.

Finally, the program’s current acquisition strategy lacks any defined plan to transition from the planned Space Act Agreement (SAA)-based Commercial Crew Integrated Capability (CCiCap) round of awards to a Federal Acquisition Regulation (FAR)-based certification and service contract. As a result, the strategy presents a significant risk of costly, lengthy delays as NASA attempts to retroactively assess competitors’ designs on safety and other standards and companies attempt to make changes in fully mature integrated designs to address instances in which NASA cannot verify that a necessary qualification criterion has been met. The Committee believes that many of these concerns would be addressed by an immediate downselect to a single competitor or, at most, the execution of a leader-follower paradigm in which NASA makes one large award to a main commercial partner and a second small award to a back-up partner.

With fewer companies remaining in the program, NASA could reduce its annual budget needs for the program and fund other priorities like planetary science, human exploration or aeronautics research. In addition, an accelerated downselect would allow NASA to focus its remaining funds and technical assistance resources on the most promising contender, potentially enabling that competitor to produce a final capability faster than otherwise possible. It would also allow NASA to return to its previous acquisition strategy of holding an open competition (to include current funding recipients and new entrants) and following a more traditional FAR-based management approach, avoiding a complex transition from SAAs late in the development process and allowing the government to better protect its interests in intellectual and physical property developed with taxpayer funds. Finally, this strategy is more consistent with current overarching fiscal guidance included in the fiscal year 2013 House budget resolution. In a climate of decreasing non-defense discretionary spending, the Committee does not believe that the Administration’s proposed budget runout for commercial crew is sustainable. [Emphasis added]

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