Coyote Blog

James Hansen wrote an editorial supporting a revenue-neutral carbon tax, and while I don't really agree with all of his justifications or economics, I do agree with his ultimate conclusion --that such a tax would be fairer, more efficient, less growth-killing, and ultimately more effective than the Frankenstein mess of parts that makes up the current cap-and-trade bill.

To be fair, I have been on this point for a while, having advocated a carbon tax offset by a payroll tax reduction to make it revenue neutral for some time, including in my most recent film.  I don't think I have to tell my readers that I am not big on taxes nor am I of the belief that any strong action on CO2 emissions is necessary.

However, I am largely indifferent between a sales tax on fuel and an equal sized sales tax on labor (which is effectively what payroll taxes are).  There is no doubt that a reduction in payroll taxes would be a helpful step in this recession, and if folks would sleep better at night with less carbon emissions, I can tolerate trading one for another.

Jonathon Adler has more, including Paul Krugman's negative reaction to the plan  (did this guy really once win the Nobel Price in economics?)

On any number of occasions from October through February, I predicted that this recession would top out at perhaps 9% unemployment at the most, and would probably not be as bad as the recession of the early 1980's.  My logic was that we had a mortgage-driven banking crisis, but that the crisis was perhaps not as bad as that of the late 1980's and that many fundamentals (e.g. interest rates) were looking way better in this recession than in the early 1980's.  I honestly thought that Bush and Obama Treasury and Fed officials were declaring the sky was falling more from the danger to their beloved former employers on Wall Street than due to any economic fundamentals.

Well, obviously I was wrong.  Unemployment has topped 10% and could be headed higher.

So the question is, do I accept that others saw something I did not, or do I crack open the self-serving excuses.  Well, at the danger that this will fall into the latter category (I will leave that to readers to decide) I do think some things have changed since late last year that have contributed to worsening the economy.

Businesses are reluctant to invest when the returns on their investment are wildly unpredictable, particularly when future income changes are more driven by changing acts of Congress rather than fluctuations in the market.   Over the last year the Congress and Administration have:

• Printed trillions of dollars of new money, raising the risk of future inflation
• Borrowed trillions of dollars, sucking capital out of private lending markets
• Run up deficits that pretty much guarantee future tax increases
• Toyed with health care bills that will substantially increase the cost of labor
• Toyed with climate bills that will substantially increase the cost of fuel and electricity
• Demagogued industries with average to below-average profitability for making obscene profits that must be reduced (e.g. health insurance companies who make 3-4% of sales)
• Taken over whole industries (autos, banks) and run them to the benefit of favored political constituencies, even when it violates the law (e.g. trashing for secured creditors of auto companies in favor of the UAW).
• Demonstrated a disdain for money-making by imposing populist compensation limits on executives of out-of-favor companies and industries.
• Spent money in the stimulus mainly to add government jobs, every one of which is generally focused on making my life running a business harder.  If you do not understand or believe this, you have not run a business that employs people.
• Shown a general philosophic hostility towards markets and capitalism

I am sure this is just a subset (Louis Woodhill has more in this vein here), but these all have negative effects on investment.  My company for one has backed out of several planned expansions this winter for four reasons:

1. Half of my costs are labor, and I don't know how much Congress is going to increase my labor costs.  Current health care bills will increase it at least 8% -- given that my typical margin in 5-8% of sales, a government action that increases half my costs by 8% is worrisome.  Worse, my smaller competitors will not bear this expense under certain versions of the legislation.
2. My second highest expense is fuel and electricity.  I have no idea right now how much Congress may raise these expenses.
3. Capital for small businesses is gone.  I can get secured equipment financing, but that is it.
4. Assuming I make any money from these investments, I have no idea how much I will be able to keep.  I would not be surprised at all if Obama pushes my marginal rates over 50% -- and investments in my business are just too much work and risk to keep less than half if I make any money.

I used to work as for several years in St. Louis as VP of Planning for Emerson Electric.  I worked for a guy named Chuck Knight, who could be a real pain in the *ss to work for, but was a) brilliant and b) always willing to speak his mind without the typical filters a lot of other executives apply.  It appears that his successor Dave Farr, who I also knew at Emerson, is following in this tradition:

Emerson Electric Co. Chief Executive Officer David Farr said the U.S. government is hurting manufacturers with regulation and taxes and his company will continue to focus on growth overseas."Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing," Farr said today in Chicago at a Baird Industrial Outlook conference. "Cap and trade, medical reform, labor rules."...

Companies will create jobs in India and China, "places where people want the products and where the governments welcome you to actually do something," Farr said.

The unemployment rate in the U.S. jumped to 10.2 percent in October, the highest level since 1983. Emerson, which Farr said employs about 125,000 people worldwide, has eliminated more than 20,000 jobs since the end of 2008 to lower expenses.

"What do you think I am going to do?" Farr asked. "I'm not going to hire anybody in the United States. I'm moving. They are doing everything possible to destroy jobs."

Politicians in both parties are generally clueless about this kind of thing, because very few of them have ever run a business or even even been in a real business position other than as lawyer or lobbyist.  Just look at how George McGovern feels now that he has run a business.

But the Obama administration is almost scary clueless.  In defending their promotion of a good business environment, they cite the most hostile item on their agenda:

"This administration has made a significant commitment to U.S. manufacturing, including reforming the country's health insurance system to bring down costs and make American companies more competitive globally," Griffis said.

Not. One. Single. Clue.

Actually, I think the Obama administration may believe this, which just accentuates their preference for a corporate state wherein "business friendly" means support for the top 20-30 corporations in the country.   In the context of a few old-line corporations with politically powerful unions, health care reform is helpful in that it dumps a bunch of the corporation's commitments to present and past workers onto the taxpayers.  But these are not the companies that grow the economy -- they are just the ones with out-sized power in political elections.

The graph is large, so you will have to click through to it, but basically it shows employment losses and wage changes by industry in the US from 2008 to 2009.  What confuses me is that all these industries show fairly large hourly wage gains, with gains the largest in certain sectors with the largest employment losses.

I come up with one of two explanations:

• Labor laws, union contracts, and other structural barriers in the economy make it difficult to cut wages in a recession, which in turn probably makes unemployment worse
• The average wage gains are due to mix shift - companies preferentially lay off newer and less skilled employees who make lower wages, shifting the average wage mix upwards.

Not sure which it is.  Probably a bit of both.

Kevin Drum and the left think falling savings rates are all ... wait for it you are going to be shocked with surprise ... Reagan's fault.  OK, you are not surprised, since in left-world everything that is not Bush's fault is either Reagan's, Wal-mart's or Exxon's.

Paul Krugman looks at this chart of the personal savings rate in the United States and concludes that Reaganomics is the most likely reason that it fell off a cliff....

But I'd point to two other things that Krugman mentions: financial deregulation and stagnant median wages.  Those seem like much more likely villains to me.  Starting in the late 70s, middle class wages flattened out, which meant there was only one way for most people to support the increasing prosperity they had long been accustomed to: borrowing.  At the same time, financial deregulation unleashed an industry that marketed itself ever more aggressively on all fronts: credit cards, debit cards, payday loans, day trading, funky home mortgage loans, and more.  It was a match made in hell: a culture that suddenly glorified debt; an easy money policy from the Fed that made it available; a predatory financial industry that promoted it; and middle-class workers who dived in to the deep end without ever quite knowing why they were doing it.So, yeah, Reagan did it.  Sort of.  But he had plenty of help.

This is a great variation of the classic "I know what caused bad trend X -- everything I was against before I learned about bad trend X."  The following was my response in the comments:

1. The chart on the left starts out at 8%. Drum picked a recession peak as his starting point, a clever trick, but it appears that when Bush 1 left office the number was still about 8%. The largest fall seems to be in the Clinton years. For which, by the way, I don't "blame" Clinton any more than Reagan, certainly not without any real evidence or understanding of the mechanism involved.
2. Drum's "consumers are all stupid pawns of electronics retailers and credit card companies" wears thin at some point.   It's funny how everyone thinks this is true... of everyone else, but not himself.
3. Let me posit an alternative. The 1980s and 1990s saw huge percentage increases in asset values, both equities and homes. This began just about at the time the savings rate dipped. I would posit that consumers, in their mental calculation of savings, included paper gains on these assets. These paper gains are not, to my knowledge, included in savings rate numbers (you can be sure that is true because, if they were, savings rates would have dropped in late 2008). Thus consumers saved less money from their paycheck (which is measured, so it showed a drop in savings rate) while they considered themselves still to be saving as much or more as previously, because they were counting paper profits on assets as savings.  The big decreases coincide with the 80's bull market, the 90's bull market / internet bubble, and this decades housing bubble.

My explanation in number three will look even better if we see an increase in savings rate over the coming years as consumer expectations about asset value changes are made less exuberant by the recent burst bubble.  A fascinating chart would be to plot savings rate against some measure of consumer expectations of future asset price increases.  I bet they would correlate pretty well.

"I can make a firm pledge"¦.no family making less than $250,000 will see any form of tax increase"¦..not any of your taxes"-Barack Obama, September 12, 2008

Oops, well, so much for that, as Obama imposes a 35% tax on Chinese tires, requiring higher prices be paid by the majority of Americans.  This is a broad-based tax aimed at supporting one narrow American industry, as a payoff to the United Steel Workers who have been sad that the UAW has been getting all the political gravy of late.

Suppose the Chinese government is massively subsidizing tire exports -- that they are taking Chinese taxpayer money and directly applying it to tire exports to reduce prices in the US.  What should our response be?  Mine would be:  Thanks, suckers.  If the Chinese really want to tax their people to subsidize lower US consumer prices, why in the world would we want to stop them?

Oh, and remember that Obama pledge to be all lovey-dovey with the rest of the world instead of that nasty confrontational Bush administration?  Well, forget that too:

HONG KONG -- Just two days after the United States slapped Chinese tire imports with hefty tariffs, Beijing has hit back by saying it would launch an anti-dumping investigation into automobile and chicken products from the U.S.

[...]

The "protectionist" policy that seems to have triggered the Chinese tit-for-tat investigation was an order signed on Friday by President Barack Obama that imposes a 35% tariff on tires imported from China on top of the existing import duty of 4%.

Can anyone say, "Smoot-Hawley."  I am sure happy we all learned from the one unequivocal lesson that every economist, left-right-Keynsian-monetarist, took away from the Great Depression -- that starting an international trade war is the best way to exacerbate a recession.  Obama has  done just about the only thing everyone agrees shouldn't be done in response to a major economic downturn.

Update: More good analysis here

Postscript: I wrote this hypothetical post from the Chinese perspective a couple of years ago:  From "Panda Blog:"

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

• Limiting yuan convertibility, and keeping the yuan's value artificially low
• Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
• Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

Under what theory of government is this a proper activity of government with our tax dollars?

Gov. Jan Brewer took the stage Thursday with rocker and restaurateur Alice Cooper to persuade Arizonans that dining out is good for the state. Announcing a three-month public-awareness campaign called Dine 4 AZ, they said going to restaurants supports businesses and helps preserve jobs. Brewer noted that restaurants generate 10 percent of Arizona's tax revenues.

"We are working hard to lead the Grand Canyon State forward and out of this recession, and Dine 4 AZ fits perfectly into our plan," she said. "Please treat your family to a meal and we'll get through this together."

It is just seriously freaking frustrating to see the government spend my money promoting other people's businesses.   And since when has dining out been a sign of patriotism?  Why is buying food from a restaurant more stimulative than buying food from a supermarket? On the plus side of all this is the spectacle of politicians taking the stage with Phoenix favorite son Alice Cooper to make a policy speech.  The only thing that would be better would be for the governor to appear with Phoenix-area resident Jenna Jamison to promote the, uh, stimulative effect of spending an evening at your local strip club.

Postscript - by the way, there is almost no point in challenging the numbers in such a stupid article, but I will bet anything I own that restaurants do not generate 10 percent of Arizona's tax revenues.  Update - In fact, based on this report, restaurants were 9.4% of sales tax collections which in turn are 61% of major state taxes, which makes restaurants and bars about 5.7% of state tax revenue, which I will admit is higher than I would have guessed but still well off the number in the article.

Update #2: OK, I am probably overworking this, but the same report referenced above showed Arizona individual income taxes dropping 32.4% in 2009, presumably due to large drops in income.  However, sales taxes only dropped 13.9% in that period.  And within sales taxes, restaurant and bar sales taxes only dropped 5.8%.  I say only, because except for some stable utility and telecom categories, this is the lowest drop of any business sector subject to sales taxes.   General retail down 12.2%.  Amusements down 8.1%.  Hotel/Motel down 11.9%.  So, in response to the down economy, the state government has thrown their weight behind shifting business to... the single retail category that has been least hurt by the recession.

I have always wondered - when politicians do something like this, do they actually believe in their hearts they are doing the right thing or do they fully know that they are cynically trying to appear to take action while actually doing absolutely nothing useful. The former may almost be scarier than the latter

OBAMA ASKS FEDERAL WORKERS TO SACRIFICE "” By 0.4 percent! "Citing the current economic recession "” and the Sept. 11 terrorist attacks eight years ago "” President Obama says he will use emergency powers to cut the programmed across-the-board January increase in federal employees' pay from 2.4 percent to 2.0 percent, according to a letter he sent to House Speaker Nancy Pelosi"¦"

I have worked full time for 26 years.  Number of years I have had a programmed, guaranteed annual salary increase to be paid irregardless of my performance:  zero.

MaxedOutMama echoes many of my thoughts on recent economic activity and the shameless way our President has been manipulating these issues:

In January, I was writing that fundamentals had taken an upswing, and that the US economy was going to try to resurge in the third quarter.

The numbers that came in for January and February did show what P-Nat projected, which was a gradual bottoming pattern overall and the beginning of some upticks. Bloomberg today:

Orders for U.S. durable goods unexpectedly rose in February on a rebound in demand for machinery, computers and defense equipment.
...
Combined with reports showing improvements in retail sales, residential construction and home resales, the figures indicate the economy is stabilizing after shrinking last quarter at the fastest pace in a quarter century. Stepped-up efforts by the Obama administration and Federal Reserve to ease the credit crunch may help revive growth later this year.

Last night Obama took credit for these events, but the stimulus package had nothing to do with it - the effects of that haven't even hit the economy yet. Very little of that package will be felt in the first half of 2009, in fact, and less than 25% of the effect will be felt in 2009. I would also like to point out that at the time the stimulus bill was being debated, the administration was claiming that the economic emergency was so dire that the representatives and senators shouldn't even be allowed to read the thing before they voted on it. Instead, this was what was really going on in the economy.

She also shares my concerns that the recovery may in fact be undone by recent government actions, not the least of which is the Weimar Republic-like printing of money to buy back government bonds and help fund a mushrooming deficit.  In fact, she and I must be fairly attuned, as she wrote:

Last week I was so sick at heart that I didn't think I could continue writing this blog.

I too felt almost exactly the same last week.  Never have I been so depressed about the direction of domestic policy (I might have felt about the same around 1978, but I was only 16 and had other things on my mind).  Every day last week there seemed to be a new policy directive crazier than the last.  I had a real feeling like I was living through the last half of Atlas Shrugged, where an increasingly desperate government initiates a series of policies with disastrous long-term effects crafted just to survive a little longer in office.  The only difference was several years in the book seemed to have been compressed into about a week of real time.

Fortunately, I am basically a happy soul and I seldom stay depressed long.  I just did what I always do when I despair for the world - spent some time with my family and concentrated on what I could fix, namely the health of my own business.

The Liberty Papers thinks we have become a lawless Banana Republic.  George Will is thinking along the same lines, snarkily observing that Sweden, China, and Mexico have all observed in one way or another that the Feds seem to be acting outside the rule of law.

I have opined in the past that what really extended the Great Depression was not any real underlying economic issue, or even vast increases in government spending per se.  It was that arbitrariness with which the Roosevelt administration dealt with economic matters.  With nutty programs like the Mussolini-inspired National Industrial Recovery Act coming and going, investors and businesses never knew from day to day what the rules of the game would be next year, or even next week.

I fear that this is exactly the climate Obama and Congress are creating today.

• When Congress reacts to CNN headlines by retroactively confiscating legal compensation that it had protected just weeks before, what will happen to my compensation?
• When government deficits soar by trillions of dollars, what will taxes look like next year?
• When the Administration says that Co2 will have to be reduced by 80%, what numbers do I plug into my forecasts for fuel and electricity?
• When the government decides on a whim to print a trillion dollars more money to pay off government debt, what will inflation look like in the coming months and years?

As of two months ago, my company was still investing.  We were still getting bank credit, particularly for equipment financing, though it took more work than in the past to secure it.  We still saw opportunity in our business, and in fact saw increased opportunity in the recession for low-cost recreation options and outsourcing of public recreation facilities.

But today, I am reluctant to make any new investments.  Investing $5000 now for $8,000 a year from now normally sounds good, but what happens now that the Feds have more than doubled the money supply?  How much will $8,000 really be worth a year from now?  What will my taxes be on the increase?**  What new costs or liabilities  might be retroactively placed on me for making the investment?  What happens if beltway pundits start thinking I am making too much money?

All this commotion of government intervention started when Paulson and other Bush appointees started screaming that the banking system was going to shut down and therefore crash the whole economy.  As my readers know, I believe to this day that this was all sky-is-falling over-reaction and panic-mongering, and most of the credit crunch resulted from uncertainty about the Treasury and its statements, not due to realities on the ground.   However, whatever tightening of credit we might or might not have avoided by government action, it pales in its effect on investment in comparison to the arbitrariness and trillion-dollar-plan-of-the-day that has been the first 60 days of the Obama administration.

** footnote: For those of you who have not lived through high inflation times, taxes and inflation are a deadly combination.  That is because the Federal Government, after creating inflation, then taxes each of us on its effects.  Here is an example:  Invest $5000 now at a fixed 10% a year.  Suddenly, inflation goes up to 8% a year.  In five years, I now have a bit over $8000.  In economic terms I have made a small profit of, since $8000 in five years at 8% inflation is worth $5,445 today.

But the IRS thinks I have made $3000, not just $445, and will tax me on the full $3000.  If they take a third, I only have $7000 at the end, or $4,764 in current dollars, meaning that after taxes, I actually lost money.

A bit over a week ago, I forecast that we had passed the economic bottom and would soon be back on the way up.  The IBD lists a number of reasons why I may be correct:  (ht:  Carpe Diem)

"¢ A broad rally in stocks, confirmed last Thursday, continuing into this week and led by the beaten-down financials.

"¢ A surprising 22% surge in February housing starts to a seasonally adjusted annual rate of 583,000 units.

"¢ A back-to-back jump in retail sales ex autos, in both January and February.

"¢ A return to profitability at several major banks, including Citigroup, Bank of America and JPMorgan.

"¢ A doubling in the obscure but important Baltic Dry Index, a key indicator of global trade flows.

"¢ An upwardly sloping yield curve, which Fed research suggests all but ensures a rebound by year-end.

"¢ A Housing Affordability Index that has hit an all-time high.

"¢ A two-month improvement in wholesale used-car prices, measured by the Manheim Index.

"¢ A rise in Monster's Employment Index in February, suggesting a turn in the job market may be around the corner.

"¢ A 4 1/2-year high in the dollar against other major currencies, on a trade-weighted basis.

"¢ A sharp increase in the money supply, as measured by M2 and M1. Weekly M2 growth has averaged 10.1% year-over-year since the start of 2009, while M1 has grown at a 14.6% rate.

"¢ A two-month rally in the Index of Leading Indicators.

"¢ A growing body of evidence that the "liquidity crunch" is dead. Data show nearly $14 trillion in liquidity on the sidelines of the markets, ready to boost consumer spending, credit growth or further stock market gains.

Of course, this makes the entire argument for the trillion dollar plus stimulus bill moot.  If my company had started spending itself into debt to fight some sort of emergency, and then found the emergency did not exist, you can bet we would be spending every hour of the day to stop as much of that emergency spending as possible.  Not so in Washington.  Despite now forecasting an improving economy, and basing his budget on this being a milder-than-normal recession, Obama has not even suggested any roll-back in the massive spending and debt-creation program.  Which just goes to prove that the "stimulus" bill had nothing to do with stimulus in the first place, but was a leftish spending plan sold based on panic, in exactly the same way the Bush administration sold the Patriot Act.

In fact, much of Obama's remaining legislative agenda (including nationalization of parts of the health care system and a Co2 cap-and-trade system) include what are effectively large tax increases that cannot realistically be passed in the depths of a recession.  So expect a lot of talking up of the economy to prepare the way for these tax increases, not to mention the tax increases that will be necesary, but have not yet been proposed, to pay for the servicing of the huge debt and new spending we just took on.

One final prediction:  As the economy improves enough for the average person to see the improvement, expect the Obama administration to be spinning like mad.  Their first objective will be to take credit for the recovery.  This is absurd, as it appears that the recovery will start long before the first dollar of spending occurs.  The media may, however, let him get away with this.  If it does not, his second story will be that the confidence exuded by the passing of the stimulus bill created the recovery.  This is also absurd on its face, given the crash in equity prices after the stimulus bill was passed and the extreme general skepticism about the stimulus in poll numbers.

Postscript: By the way, I would argue the whole story of this stimulus bill is a microcosm of the climate debate.  Extreme panic was generated based on a fear that their might be some possibility of a catastrophe (ie a second Great Depression) and that on the precautionary principle, we spent a trillion dollars just in case.  Remember that in January, Obama said there will be - not might be - another 5 million job losses, a number we will come nowhere near.

As it turned out, there was never a realistic chance of a catastrophe, but the costs will remain, and all the while the panic over the issue was used as cover to pass a whole range of freedom-reducing initiatives.   Naomi Klein was half right in the shock doctrine -- there are folks who use emergencies to successfully push for radical change, but it is almost always the forces of more government control who win out, not the supporters of laissez faire.

Update: A similar list here from Forbes.

Thomas Sowell, via Carpe Diem:

The current political stampede to stop mortgage foreclosures proceeds as if foreclosures are just something that strikes people like a bolt of lightning from the blue-- and as if the people facing foreclosures are the only people that matter.
What if the foreclosures are not stopped? Will millions of homes just sit empty? Or will new people move into those homes, now selling for lower prices-- prices perhaps more within the means of the new occupants?

The same politicians who have been talking about a need for "affordable housing" for years are now suddenly alarmed that home prices are falling. How can housing become more affordable unless prices fall?

The political meaning of "affordable housing" is housing that is made more affordable by politicians intervening to create government subsidies, rent control or other gimmicks for which politicians can take credit. Affordable housing produced by market forces provides no benefit to politicians and has no attraction for them.

In the wake of the housing debacle in California, more people are buying less expensive homes, making bigger down payments, and staying away from "creative" and risky financing (see chart above). It is amazing how fast people learn when they are not insulated from the consequences of their decisions.

I am not an economist, so anyone who invests any money on my prognostications is insane.   But here is my prediction, just for fun.

I think that if you fly down below the hysteria, there is good reason to believe that somewhere in February or early March we passed the bottom, in terms of the rate of job losses and output reductions.  Job losses will continue for several months, but at a declining pace, with the low point in employment occurring sometime in the late 2nd or early third quarter.  I am about 50/50 as to whether the unemployment rate will peak in the high eights or low nines.  We will see real recovery beginning in the third quarter.

I am a tad less confident in this only because we have dragged out a number of reckonings (e.g. GM, some banks, some mortgages, etc) which should have occurred last year, which may delay the recovery somewhat vs. if we had just taken our medicine sooner.  The big wild card, of course, is what effect massive government borrowing and tax increases will have on the speed of the recovery, and, now that I have seen this chart, on inflation.

Just to show I am putting my money where my mouth is, I moved much of my savings to equities last Thursday.

It is a well-known fact that women, on average, make less than men in the US work force.  Whether that appalls you depends a bit on your political motivation, as well as your facility and honesty with data analysis.  The raw numbers tend to show a large gap, while numbers corrected for things like years in the work force, education, and industry selection tend to show a smaller gap.

A big driver of gender wage disparities is the industry in which males and females tend to work.  Male preference industries like construction and heavy manufacturing tend to pay more than female preference industries like health care and education  (yes, I know we could argue all day as to whether these industries are truly a preference or the result of some implicit cultural direction, but I am not going to touch that today).

But one thing I have never thought about, or heard discussed, is the issue of risk.  When we discuss securities and investments, we often talk about income in the context of risk -- the more risk one takes on, the higher the average returns one typically gets.  It may be, though, that we should talk about employment income in the context of risk as well.  After all, if one were looking at two fairly similar jobs, except the chance of layoff or job loss were much higher in one than the other, then one would expect the job with more job loss risk to pay more.

In this context, recent job loss numbers by gender are interesting  (a story, by the way, Mark Perry has been on for months but the MSM is only just now waddling in to notice).

Via Reason:

Obama has promised that no family earning less than $250,000 per year will pay one dime in higher taxes. But the companies that have to pay for permits will pass that cost on to consumers in the form of higher prices for electricity and other products. So these families will pay $645 billion, only some of which will be returned in the form of lower income taxes, for a system that is terribly inefficient.

The solution, of course, would be a straight-forward tax on carbon, the proceeds to be refunded through the payroll tax system. But unlike the hidden tax of cap-and-trade, a carbon tax is out there for the voters to see. And given the choice between a stealthy tax and a visible tax, politicians will pick the former every time.

I just skimmed through Obama's speech.  I am not particularly good at parsing this political stuff, so I won't.  The speech had a lot of the typical politician's assertions about features of his programs that have no basis in their actual design.  For example, he asserts that home bailout money won't go to the irresponsible, but there is no such design element in his actual plan (homeowners are eligible for bailouts based on various hard-wired value formulas and ratios -- there is no step where their motivation for becoming overextended is or even could be assessed, nor any step where the government may exercise discretion).

Anyway, the one overriding sense I got from reading the speech was that I was totally correct when I wrote this:

So you ask, will we get any stimulative effect?  I would answer:  Just one.  Obama and Congress will now shut the hell up trying to panic everyone into battening down the hatches for the worst economy in history, and folks can get a bit of breathing space to look around them and see that business opportunity is still there.  This is $800 billion in hush money, a bribe we are paying Obama and Pelosi in the form of passing a lot of their pent up leftish wish list, in return for them taking some ownership interest in real economic health.

From an article about the Edsel:

total new car sales in the United States declined 31% from the 1957 to 1958 model years

Gosh, and we managed to get out of that without spending a trillion dollars.  Wow.

Postscript: Sometimes it is hard for fiction to top reality.  In vacation, the movie-makers tried to create the ugliest station wagon they could imagine.

They didn't even come close to topping reality

The Chrysler web page for their restructuring plan they presented to the Feds is here.  The summary pdf my comments are based on is here.  Thoughts:

1. It is criminal that this is going to Congress, not a bankruptcy judge.  This is a conspiracy of management (looking to hold onto their jobs and equity), equity holders, and employees to usurp value from the senior debt holders, who would normally be first in line in a bankruptcy.
2. There is no WAY I, as a private investor, would put one additional dime into Chrysler based on this plan.  All the Same-Old-Incremental-Sh*t, with no explanation of what they are going to do differently.   Somehow they are going to cut half their models and lay off tens of thousands of employees but hold fast on market share, somehow reversing years of steady decline.  No explanation of how.
3. In section one, they blame it all on the credit markets.  Specifically, the lack of ability of the Chrysler finance arm to lend to customers.  But I showed the other day that consumer lending is still strong by banks.  What they are really saying here, but they are smart enough not to utter the actual words, is that their sales depended on a finance arm that was willing to lend at below-market rates to people with bad credit scores, and the lack of this hidden subsidy is what is making it hard to sell their cars.  Credit exists -- what no longer exists is zero-percent-interest-to-anyone-who-walks-in-the-door-no-questions-asked financing.   Instead of figuring out how to make cars that don't require hidden subsidies to get off the lot, they are trying to get the government to fund their hidden subsidies.
4. The present value calculation is a joke.  I could spend 3-4 business school classes discussing problems with it, so I won't now.  But one element that stuck out at me was that they come up with a terminal value in the calculation as a multiple of EBITDA  (Earnings before Interest, Taxes, Depreciation, and Amortization).  Really?  EBITDA is a common metric, but it is beyond meaningless when looking at a company going bankrupt under the weight of interest costs and capital spending.  Besides, they have the gall to assume that net cash flow (excluding financing activities) will be positive for the combined years 2009-2010.  Im-freaking-possible.  Remember, if any private investor in the country believed these numbers, Chrysler wouldn't have to be begging at Congress's door.  Congress is their last chance to find a sucker who will give them more money.
5. OK, I can't totally leave aside the NPV calculations yet.  They have a table of NPV's at different rates of return  (which is meaningless because their cash flow assumptions can't be believed).  The rates of return are 5%, 10%, 15%, and 20%.  This is ridiculous, though many may not recognize it.   20% is a low rate for the discounting of about any large equity investment, but it is absurdly, ridiculously low for a high-risk investment in a company that has been burning cash for decades and is facing its second near bankrupcy in 30 years.  Any savvy investor in the world would smell a dead fish here, but Congress won't because Chrysler is waiving electric cars at them
6. And speaking of electric cars, any intelligent restructuring plan would recognize that electric cars, even if they are successful in the marketplace, are not going to be anything but a cash drain for years.  This kind of thing has to be put on hold while the company gets back on its feet.  But instead, since this is a political and not a business document, Chrysler is practically leading with it.  In fact, the sections "4:  Commitment to Energy Security and Environmental Sustainability", "5:  Compliance with Fuel Economy Regulations," and "6:  Compliance with Emissions Regulations" all come in priority order ahead of "7: Achieving a Competitive Product Mix and Cost Structure."  In fact, this section about costs and competitive products comes dead last in the plan.  LOL, a "business" plan, indeed.
7. I thought it was funny that on the cover of the report, they have all kinds of happy politician-grabbing stats about how many red-blooded Americans they employ and how much of their production is made in the good old USA.  But their entire restructuring plank #3, which is labeled "strategic alliances," seems to boil down to a bunch of outsourcing to foreign partners.  Which is fine with me, but probably would freak out the Dems they are selling it to should they figure it out.

In the new corporate state, this is what business plans will look like.  Because were aren't selling returns and wise investment of capital, we are selling the care and feeding of political constituencies and pressure groups.

Postscript: OK, I realize I criticized the plan without suggesting what should be in it.  Here is what I would demand as an investor:  An achnowlegement and discussion of the reasons for past market share slide, and targeted actions to reverse these trends.  As Chrysler has said they have been working on this problem for 30+ years, the proposed solutions will need to sound radical, not incremental.  Further, they need to stop complaining that below-market rate consumer financing does not exist, and explain how they are going to sell cars at a price that covers their costs as well as a return for shareholders.

The narrative is that this recession is driven by a credit crunch.  So why is consumer lending arguably stronger than in any of the past 9 recessions?

I remember Democrats scoffing at GWB's on-time tax refund checks last year.  I agreed with them at the time, thought potentially for different reasons, saying that one-time rebates are far less attractive than permanent rate changes, and a rebate that just increased the national debt was robbing Peter to pay his dad.

So I am not sure how the Democrat's explain this any differently (from an email I got from the SSA)

Dear Colleague:

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009. This new legislation provides a one-time payment of $250 to Social Security and Supplemental Security Income beneficiaries.

Over 60 million beneficiaries will receive a one-time payment. We expect all payments to be delivered by late May 2009. To assist us in issuing these payments as quickly as possible, beneficiaries should not contact Social Security unless they do not receive their payment by June 4^th. As we move to implement the new legislation, we will continue to provide updates to keep you informed of our efforts in this area.

You can learn more about these one-time payments at www.socialsecurity.gov.

We ask that you share information about these efforts with members, colleagues and any parties who would find them of interest.

I look forward to the opportunity to discuss this important legislation with you.

Sincerely,

Cheri Arnott

Associate Commissioner

for External Affairs

The only difference I see is 1) the rebate is going to a lot of people who do not even pay taxes and 2) by giving it to social security beneficiaries, the generational wealth transfer is all the more stark.  Now we are robbing Peter to pay his grand-dad.

Well, while I was gone this week, GM asked the government for another $21.6 billion, on top of the $17.4 billion taxpayers handed them just two months ago.   Reading between the lines of GM statements, it is probably not crazy to assume they are burning cash at the rate of $5-$8 billion a month, which means this new infusion would likely get the company only through May or June.  This burn rate should not be surprising, as GM was burning $2.5 billion a month before the recession even really started, and they have really done nothing substantial to restructure the company.  By throwing the company to Congress to help save its managers and equity holders, the company has subjected its restructuring not to hard-headed bondholder representatives in a bankrupcy, but to the vagaries of the political process:

When the president's auto task force meets today to begin trying to fix the broken U.S. auto companies, it must balance dozens of competing demands.

Yeah, I am sure that will go well.  GM can have its money as long as it puts a factory in West Virginia and names it after Robert Byrd. The bondholders are pissed, as well they should be.  The senior debt holders have first claim in a bankruptcy, so another way to look at this political process is that it is the action of all the other constituents of GM (employees, equity holders, managers) who are trying to get Congress to interrupt the typical subordination of interests in a bankruptcy and allow them to get ahead of the senior debt holders in the line for what limited value remains in GM's shell.

I am tired of Keynsians and their assumptions setting the tone of the economic debate.  Here is the question I would ask them:

I understand that you Keynsians think that there are under-employed assets in the country, and that you think the government can redeploy prvate investment capital to more productive use.

Ignoring the individual liberties issues assosiated with this approach, as well as the fact it has never worked in the past, answer me this:  How are we going to turn around the economy by forcing capital to flow to the assets, industries, and management teams that have proven themselves to be the least productive?

We send money preferentially to the industry (autos) that has been showing some of the worst returns on capital in the entire country, and in particular to the company (GM) that has performed the worst in the industry.  If we really wanted to create auto jobs, wouldn't we send the money to the company that has historically invested money the most productively? It would be as if venture capitalists were about to complete their 27th round of financing to keep Pets.com afloat.  I have been in a company that eventually failed and couldn't get new financing.  At the time we were trying to convince the investors that they should give us just one more round, one more chance to prove the thing out.  In retrospect, I am embarrased they funded us as long as they did.  They should have pulled the plug way earlier.  Investors have a saying "your first loss is your best loss."

And don't even get me started on housing.  A deader, less productive investment asset can't possibly be identified.  A million bucks spent on a house produces 30 jobs for 6 months.  A million bucks spent on a factory expansion produces 30 jobs indefinitely.  For years, Democrats have hammered the Republicans over the jobless recovery of this decade, which in fact has shown a fairly unique jobs profile.  I wonder how much of this could be traced to the myriad incentives that were put in place to pour our available capital into these dead assets?  And now, with the bailout and the new mortgage bailout, the government is investing even more money to prop up the value of these non-productive investments.

It has been interesting to watch the reaction to Obama's mortgage-holder bailout.  Certainly the plan is expensive, likely largely ineffective, and has terrible long-term impacts on incentives.   To my libertarian eyes the plan is awful, but no more awful, and actually less expensive (incredibly!) than other bailouts and legislation pouring out of Washington of late.  Like everything else we are seeing, it is a hair-of-the-dog plan:  fix government over-promotion of home ownership with more government promotion of home ownership;  Fix the fact that individuals are over-leveraged by trying to keep them in their mortgages.

But this issue changes the political map to some extent.  The usual rhetoric about milking one group to help another who are "on the outs by no fault of their own" is just stretched past credulity on this one.  Sure, there are enough folks who were really tricked or scammed in their mortgages to fill up any length of a news segment with tearful anecdotes.  But the 50% of the country that rents or the large percentage of homeowners that didn't chase around after zero-down house-flipping deals don't seem to be buying that their tax money is now flowing to innocent victims.

Postscript:  I know there is a tendency to leap onto this "fraud" excuse to help assuage one's ego.  Yeah, I wasn't stupid, I was tricked!  Well, I am in some financial tough times, and I will declare it here publicly:  It is all my fault.   I got overly exuberant in expanding the business, and doubled down on my mistake by agreeing to a large financial commitment based on a bank's loan commitment letter, rather than an actual loan (a commitment letter that was pretty much worthless as the bank went into FDIC receivership).   I have found, by the way, that my banks have been very reasonable about restructuring commitments as long as I come to the table with a plan showing how I intend to pay them back every cent that is theirs  (yes, I said it, it is theirs -- it is their money) though just with altered terms and timing.  The good news is that a ebbing tide reveals a lot of rocks, and the business has been vastly improved by the thorough review and restructuring we have put it through of late.

One problem with the stimulus bill is that it is so diffuse, so poorly understood, and so impossible to measure, that it will allow its supporters to claim anything about its effects.  If no one knows what is in it, how do you measure effectiveness?  Long recession?  Those dang Republicans slowed the bill and kept the size too low.  End of 2009 recovery?  It's because of the stimulus bill (never mind that the money will not have even really been spent).  So, in the interests of setting a reasonable baseline, here is the pre-stimulus economic projections:

Via Carpe Diem.

In case you are not infuriated enough over this bill, remember that Obama is looking at exactly this data when he makes his proclamations of continued economic doom to scare folks into passing his pork-spending liberal wish list stimulus bill.    Remember when Obama said "My economic advisers have told me this recession will last 4-5 more months, and then we will start to see a recovery?"  Yeah, neither do I.  I remember him projecting another 5 million lost jobs.   Do you think if he said "the economy will start growing again in 5 months" he could have passed a 10-year "stimulus" bill?  Fat chance.  Maybe he is the new FDR, but with a new phrase "The only thing we have to promote is fear itself."

Carpe Diem also has a useful comparison to 1981:

Back then, we responded with tax cuts and a focus by the President on reducing the size of government.  Twenty-five years of prosperity followed.  Today we are responding with a trillion dollars of money for government bureaucrats, increases in welfare, and pork for favored corporations.  I am not hugely confident.

The mechanism for this recession seems pretty clear:  A bursting asset bubble has left both lenders and consumers over-leveraged, so everyone is trying to reduce their debt.  This means less consumer spending for a while, as well as tighter lending.

Running a small business over the last few months, I have found that the credit we need to expand is not unavailable, but is harder to get.  Banks and individual investors are asking for tougher terms, more collateral, and are being pickier about what they will fund.  All totally normal and unsurprising (though stressful if you are in the middle of it).

The one thing small borrowers like myself have in our favor:  Eventually, lenders have to lend and investors have to invest.  They simply cannot just put all their money in the vault or the mattress.  The money they hold, in deposits and CD's and whatever else, has a cost, as do their operations staff.  These costs have to be covered.  The only way they have of doing so (short of switching businesses) is to put their free cash to work.  They have to lend it and invest it.  It's  a useful thing to remember in this world dominated by the cult of victimization and helplessness  -- that even as a borrower, you have power.  Banks need you as much as you need them.

So, what does the government do now?  Well, very soon, the Obama administration is going to be marketing to banks and investors an additional trillion dollars of government bonds backed by the full faith and credit of the US taxpayer as an alternative investment to funding my business.  Uh, yeah, that's sure going to help.  On Thursday, I had some power with investors.  Given time, they were going to have to consider my business as a place to put their money to work.  Now, however, everyone can run out and park their money in a trillion dollars of new government securities that have features attached I can never match (e.g. the ability to print money or grab it at gunpoint to repay the loans).

But don't worry about me, I will figure it all out.  I just will not grow the business or hire as many people as I thought I could given new investment capital.  But everything will be fine for the country as a whole as long as you believe that Nancy Pelosi and Barack Obama, with their vast business experience, will invest this trillion dollars more productively than I, and other like me, would have.

October 2008 was a failure of nerve.  As so often happens, folks who normally support letting failing institutions fail when times are good tend to lose their nerve when the crisis is at hand, and find some way to convince themselves that somehow, this time is unique and different.  But it is not.   Only later is there remorse.  I won't want to pick on Megan McArdle too much, if for no other reason than she is generally the first person on the planet to admit she is wrong, but you can start to see some of the remorse here:

We're now making many of the mistakes that Japan did.  I know, I know--I supported TARP I.  But I did so because at the time, there seemed to be a reasonable possibility that the funds could stop a liquidity crisis from turning into a solvency crisis.  But if liquidity crises go on long enough, they become solvency crises, so whatever we had then, we now have a badly crippled banking system.  More of the same isn't going to help.

We need a plan that is going to force the banks to recognize and write down their bad loans, restructure dysfunctional borrowers, shut down the banks that are too far gone, and inject substantial capital into the banks that are strong enough to pull through.  But that kind of radical action is scary.  And whether they decide to do it by nationalizing bad banks, or by injecting capital into good ones, the political cost is going to be very high.  So we get baby steps and vague promises of major leaps forward down the road.

Another political problem is that recapitalizing the banking system involves, in the initial stage, conserving capital (read: cutting credit limits), and writing down bad loans means unpopular actions like restructuring failing companies (read:  layoffs) and foreclosing on hopeless borrowers.  One of the major arguments against bank nationalization is that a government-owned bank will find it harder, not easier, to do those things.  The temptation to keep large employers on life support will be large, and every congressman will have a list of firms in their district that can't be allowed to go bust.

I have tried to have this and other bailout arguments with a number of folks.  This is often a hard conversation, because people have trouble separating in their minds the productive assets of these companies (factories, investments, systems, deposits, trained people) from the institution itself.  So when we talk of bankruptcy of, say, GM, they think if GM goes poof, then all those factories and cars go poof.

But that is absurd.  Remember the huge gas shortages that resulted from the loss of the Enron gas trading desk and transportation infrastructure when Enron went bust?  Yeah, neither do I.  That's because all of Enron's productive assets flowed through the well understood chapter 11 (or was Enron Chapter 7) process to new owners.

By the way, by management, I mean something broader than just the CEO or the top tier of managers:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

Bankruptcy is a scary term, but here is what makes it beautiful -- it takes assets out of the hands of failed management, failed business plans, failed management cultures, etc. and puts those assets in the hands of new owners and managers.  These new owners and managers are not guaranteed to be better at managing the assets, but the odds are they will be since the performance bar set by the last management team is by definition so low (ie, they went bankrupt!)

When we interrupt the bankruptcy process and bail out a failing company, we do two things:

• We leave the productive assets of the company in the hands of the same failing management (again, with this term defined broadly as above) that got the company into the current straights, rather than putting the assets in the hands of new owners
• We focus the country's limited investment capital (via taxes or government borrowing that crowds out private borrowers) towards what are by definition among the worst managed institutions in the country.   If someone asked you to invest a billion dollars either in the top 10 most successful companies or the bottom 10 least successful, where would you put the money to create the most jobs and growth?  In the top 10, right?  But the government is doing EXACTLY the opposite.

Here is the true economic miracle of the 80's and 90's:  Not Reagan's tax cuts or Clinton's economic plan or Alan Greenspan in the Fed.  It was the fact that the government, with the American economy sweating under some very difficult conditions (worse than they are today, but you would never know it in the press) and under strong threats from Japan and Europe, basically did ... nothing.  There was all kinds of pressure to create an American MITI  (seriously, it seems like a joke today, but the push was strong).  We did not.  The American economy was allowed to restructure itself.

This is why our recessions tend to be shorter than those in Japan and Europe.  These other economies are generally more of a corporate state, with a major goal of the government to maintain the incumbents in the corporate world.   I would argue that the key determinants to recovering from a recession quickly are asset, capital, and labor mobility.  Japan has many structural limitations on these, and it dragged their recession out for years.  In the name of trying to avoid the problems Japan has faced, we are repeating the exact same mistakes.  Every step we have taken so far to deal with the "crisis" have reduced the asset, capital, and labor mobility the economy needs to right itself.

Ayn Rand had an image in Atlas Shrugged that has always stuck with me.  The government looter-weenies were likened to a guy standing on the roof of a boxcar on a speeding train, claiming to be in charge of the train's motion.  To extend the analogy further, a guy on top of a freight car (in Rand's day) only had the power to slow the train down (via the brake wheel on the car) but obviously had no ability to accelerate the train and had no relationship to the real motive force that drove the train.

The analogy has always been a powerful one for me in viewing Congresses and Presidents when they talk about the economy.  Claiming to be in charge of the economy, they have little power except to impede its progress.  And they have so little connection to the true motive force behind the economy, that it is clear they don't even comprehend its operation.

Which all leads me to wonder, is the rush to pass the stimulus bill based on a true perception of emergency, or is it driven more by the need to do something before the economy heals itself (which is the only way the economy every recovers).  Via Carpe Diem, the NY Fed model based upon year-ahead yield curves is predicting that we will be out of recession by the latter half of this year:

The home page for the NY fed model, including data, explanations, and its history is here.

Update: Here is a longer history of the metric.