George Sarant

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Archive for the ‘economy’ Category

GOVERNING TO THE MAX

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The federal, state, and local governments always adapt the most optimistic scenario of revenues going forward, and then proceed to go ahead and spend on that basis. When these projections don’t materialize they are caught unprepared, especially at the state and local level, since they cannot print money like the federal government. Prudence would suggest that rather than proceeding on the rosiest assumptions, more cautious figures ought to be used. Instead they assume that things will be as good or better than they are at the moment, never worse. This is not to suggest that more realistic projections are not made in some cases, but those tend to be ignored in practice.

But things do occasionally get worse and revenues do fall below expectations. Everyone else has to tighten their belts when things go south. Businesses have to cut back ,as do individuals, but not the government, or it goes into crisis mode. In the recession everyone else has had to do more with less, but government just keeps growing, especially at the federal level. Locally, when the economy tanks there is less flexibility. If suburban property values fall, as they have in the housing bust, the income from property taxes that local governments depend upon is going to be reduced since houses are worth less. With reduced revenue they must choose between cutting back or increasing taxes, opting for the latter to the extent they can get away with it.

If governments simply adapted more realistic assumptions they would be in far less trouble, as several states are now, and there would be more stability, But when times are flush and the tax revenues roll in they make sure they spend every penny of it, usually for “unmet needs,” instead of either reducing debt, maintaing a rainy day account, or returning money to the people it belongs to through tax reductions. They usually go for the maximum they can squeeze out, and this is a feature that has been characteristic of all governments throughout history, no matter what form they take.

There is a reason for this, which takes us to my Prime Axiom: All entities constantly seek to grow and expand. Whether it is the state, social institutions, business, educational or religious institutions, at the top of the agenda is continued growth and expansion. It is a collective organic compulsion that takes on a life of its own. Rare is the entity that seeks to reduce itself. There is an even more basic reason for this; people always want more. Whether it is power, money, glory or simply more stuff, everyone wants more. That being the case, people in institutions continuously want more out of the environment they operate in. They  feel compelled to be bigger tomorrow than they are today. it is no surprise that government acts in the same way. The differences is that there are fewer checks and limitations on the state than there are  in any other domain. They get to write their own rules.

Once we understand how compelling these characteristics are in human nature, it is easy to see why government, which is composed of human beings, inevitably grows without limitation. The state always seeks to govern with the maximum number of resources it can obtain.  This leads to ever increasing incursions into the private sphere, which is diminished, as it retreats before the endless state appetite for power and revenue. But as the government takes on more and more, its effectiveness becomes less and less, until it can no longer honor its commitments and heads towards collapse.

How then do we reduce the insatiable appetite of the state? It can only happen if people become aware of the process that is engulfing all of us. There are some states where government has changed course, limiting itself and lowering taxes, and it is no surprise that they are growing while other states with high taxes and regulation are losing jobs and people to them. It is only when we realize what we are doing to ourselves, for we do have a government composed of the representatives of the people, that we can begin to reverse course. We do not always need more and more, and must learn to limit ourselves. Some things do not get better with growth and expansion, for where the state is concerned, it contains the seeds of its own demise.

Written by georgesarant

March 16, 2013 at 10:11 PM

ECONOMY AND SOCIETY IN 2011

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These are the gloomiest times we have seen since the Carter years. This is confirmed by survey after survey showing a lack of faith in institutions, a lack of confidence in the future, and dismal economic statistics. The stock market dropped 450 points last week, or 1300 so far this month and 2000 for the year, wiping out $3 trillion in wealth. The previous week the market finished its wildest week in history, with four 400 point or more daily swings in a row. Though a lot of this was pure silliness, and an overreaction to the slightest scrap of news, mostly from overseas, it is clear the economic fundamentals are not good. Unemployment is over 9% and underemployment is 18% plus. One in five males are out of work, with profound social consequences.

Gold is up 30% for the year. What does it say when gold is a better investment than productive assets that would actually provide growth? There is fear and uncertainty across the land. 47% believe the future is only going to get worse, 73% say the U.S. is on the wrong track, while the number of people satisfied with the way things are going has hit a new low at 11%. Deficits are running at 10% of GDP, with debt over 100%. In short the economic outlook is bleak.

There is an even chance the economy is tanking again as anemic growth sputters towards a double dip recession. We are constantly bombarded with a frenzy of bargains deals to try and increase sales without much effect. Yet despite so much slack in the economy prices are rising and may get worse thanks to all the money the Federal Reserve has pumped into the economy. So far the government response has been, if anything, counterproductive. The last time I used the title Economy and Society was in 2009, ending with the question what if it (the then proposed trillion dollar stimulus) doesn’t work? Clearly it didn’t work and government policies have brought us to our current circumstances.

The news from Europe is even worse, souring markets around the world, as countries struggle with debt problems and their banks appear shaky. But in the big picture what is really going on is a wave across the western world, as the realization begins to set in that unsustainable spending, borrowing, and entitlements cannot continue without sufficient population growth. This is not really news as it has been predicted for years, but unfortunately governments ignored the problem and failed to deal with long-term arrangements, instead reacting to short-term, day to day headlines. Now they are running out of options.

Given chronic government mismanagement there is nothing a change in policies would not correct by, i.e. returning to balanced budgets and sound money. Everything will not go down the tubes unless we let that happen. It is still within our power to correct these conditions, if the vision and will can be found. For the question is whether we still believe in the future, or whether we will bury our heads like the Europeans and slowly fade away. Americans are usually the most optimistic of peoples, and that dormant positive outlook needs to be rekindled. Unless we think the world is going to end, things will turn around sooner or later, depending on when we take the right actions. Economic forecasting is about as reliable weather forecasting so dire predictions need not trouble us. There are always gloom predictors and boom predictors, but most of the time we manage to muddle through somewhere in the middle, as neither the very worst or the very best often happens.

Written by georgesarant

August 20, 2011 at 9:08 PM

Posted in economy, government, society

US ECONOMY AND THE WORLD

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Vladimir Putin described the United States as a “parasite” on the world economy due to the pre-eminence of the dollar, which presumably provides certain advantages. This comes from someone late to the world economic party, considering that Russia still can’t even qualify for the World Trade Organization and remains an economic backwater. But then Putin is nostalgic for the Soviet Union, the Cold War, and great power status. He thinks by being antagonistic to the US he elevates Russia, but no one wants to play his game on this end. The long-suffering Russian people deserve better than the gangster government they have, and attempting to deflect blame for life’s miseries via ultra-nationalism will not rescue a grossly mismanaged state. Given that he’s not exactly buff he should also keep his shirt on.

It is easy to understand resentment of American dominance, although this comes at the expense of no other country. Indeed in all of history there has never been a more benevolent world power. Since World War II the American military has kept the world at relative peace not only for the US but for everyone else, thus providing stability and prosperity. This has come at huge cost to the American people, and the US has the burden of carrying a load for the world in other areas as well. The American economy is still the engine driving the world economy, and if it sputters so does everyone else. Americans are also subsidizing the rest of the world in terms of innovation across the board, but particularly in health via new cures and drugs. For example, the Nobel Prizes in medicine has been awarded to more Americans than to researchers in all other countries combined. Eight of the 10 top-selling drugs in the world were developed by U.S. companies. With this, however, come all the development costs, which are largely born by the US market. So the US is hardly “leeching” on the world economy but rather is carrying a heavy burden.

But the extent to which American problems are displaced across the world can be overstated. The stock market dropped over 700 points this week not due to anything domestic but rather because of fear of defaults and economic collapse in Europe. So while markets crashed and even gold went down, where did money from around the world flow? To US Treasuries, for safety and security, actually driving down the yield. In this context the S&P downgrade of US debt from AAA makes no sense. True the government has to rein in borrowing and cut back on debt, but that process will work itself out. The momentum is all in the direction of cutting spending and debt reduction over time. The economy may be doing poorly at the moment, in no small measure due to the federal government, but this will be set right. After all change is coming; change you can believe in.

Written by georgesarant

August 6, 2011 at 6:04 PM

ECONOMIC MISMANAGEMENT

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The ideology of the left recognizes little distinction between the state and society, and this view pervades the current administration. Decisions that properly belong in the private sector are being second-guessed or usurped by government officials. The most egregious case involves the NLRB (National Labor Relations Board) and the Boeing corporation. Boeing has substantial facilities in Washington state and recently expanded by creating a second production line in South Carolina for its 787 Dreamliner. You would think that expanding capital investment and jobs is a good thing for everyone, but not for administration bureaucrats.

The general counsel of the NLRB has issued a complaint against Boeing on behalf of the International Association of Machinists union, which if successful, would actual compel the company to move its South Carolina operation back to Washington State. The reason for this is that South Carolina is a non-union, right-to-work state, i.e. you aren’t forced to join a union to work. Never mind that, as it turns out, this expansion will also lead to an increase in jobs in Washington State as well. This is an outrageous and fundamental abuse of government power for which there is no possible justification. It is an entirely political move, which is not surprising, given that AFL-CIO President Richard Trumka boasted during a February news conference that he’s “at the White House a couple times a week, two, three times a week.” and that he has “conversations every day with someone at the White House or in the administration.” It is just as bad when a crony-capitalist corporate executive has similar influence.

Politicians are inept enough at running the government, never mind trying to run the economy. This is the sort of state direction you would expect in Russia and China, where state-directed capitalism prevails, not the United States. But apart from the sheer stupidity of trying to manage business decisions, badly, either we are a free society or we aren’t. Either individuals and corporations are free to make decisions about their own affairs or they are not. It is not the business of the state to arbitrarily favor one group over another, or determine how they will conduct their affairs beyond established law and regulations. No wonder the economy continues to falter.

Written by georgesarant

July 31, 2011 at 3:28 PM

Posted in economy, government

MAKE THE DEAL

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There are times when a strategic retreat makes sense, even losing a battle in order to win the war. That is the position the Republicans are now in with regard to the debt ceiling-budget battle. Although polls indicate that most people agree with conservative positions on these questions, when it comes to assigning blame on the impasse, 39% blame the Republicans, not Obama. Given this reality it makes no sense to continue insist on legislation that is not going to go anywhere given the Democratic Senate, although the Republican House membership must be credited with some great ideas. The question is how to ultimately get them implemented.

It is in everyone’s interest to get this default issue behind us, and take the McConnell plan, or something similar. That puts an end to the immediate crisis until the next election, at which time conservatives will be in a much better position to capture the Senate and Presidency. At that time the President will have no cover, no basis to blame Republicans, and will have to take the fall for the lousy economy. It is important to keep the long-term picture in mind. Most goals can be reached, but after 2012, if cooler heads prevail.

Written by georgesarant

July 23, 2011 at 1:40 PM

Posted in economy, Politics

OIL AND FOOD

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Since turmoil began in the Arab world the price of oil has steadily risen. This was preceded by a large increase in the price of food, which has been a significant contributing factor to unrest around the world. For the eighth consecutive month the United Nations index of global food prices hit another record high in February. While weather has been a contributing factor, government policies have exacerbated the situation. Corn prices have nearly doubled since a year ago, and corn is a vital element in many commodities such as animal feed, which in turn affects meat prices. This is a direct result of inane government policies that heavily subsidize biofuels such as ethanol, thereby diverting large tracts of agricultural land away from food production, not to mention paying farmers not to grow crops. Today there are growing food shortages around the world, and rising prices affect the poorest populations disproportionately as a much higher portion of their income goes towards food. There is certain to be price inflation at your local supermarket as well.

While oil prices skyrocket our government pursues policies designed to make the cost of fossil fuels high, based on the illusion that vast quantities of green energy are just around the corner. They are not, and our society is unavoidably dependent on fossil fuels. Meanwhile a huge portion of our balance of payments deficit goes towards the import of foreign oil, leaving us dependent on unstable and/or unsavory regimes around the world, even as abundant domestic resources remain unexploited. The EPA has done everything possible to frustrate domestic energy producers. Meanwhile the Interior department continues to maintain a moratorium on offshore drilling, even in defiance of a federal court order, frustrating not only production but costing thousands of jobs in the gulf region. Vast tracts of domestic resources remain off-limits. New technologies make possible the extraction of oil and gas from shale deposits around the country, but those efforts are being frustrated. Meanwhile roadblocks are being thrown in the way of piping in oil from the Canadian tar sands. We have domestic oil resources but production is being frustrated, denying us an essential resource that is bound to become ever more scarce and expensive as Asian demand increases in the coming years.

These increased costs will radiate throughout the economy, increasing the cost of transport of goods as well as the goods themselves, which means the cost of living will rise. That along with loose money policies will result inevitably in inflation, the likes of which we have not seen since the 1970s. It is time for these destructive policies to end and to maximize production to our full potential. Failing that we will pay a heavy price in the not too distant future.

Written by georgesarant

March 9, 2011 at 9:18 PM

Posted in economy, government

WHITHER CHINA

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Chinese President Hu Jintao recently completed a triumphant visit to the United States, at least according to the Chinese media. American officials wound up looking like fools as they sat through an anti-American song played by pianist Ling Ling, to the delight and contempt of Chinese nationalists and hardliners. The prevailing narrative these days is that China is rising while America is declining. This may well be the case over the next few decades if we allow it, but there is nothing inevitable about it. If we seriously reduce our deficit and institute pro-growth policies so that the economy grows at 5% this won’t happen. But the government is a long way off from getting the economy on a solid footing. On the other hand there is no certainty that China will continue to grow at a 10% rate indefinitely any more than Japan did.

China faces a host of internal problems. There is rising inflation and a property bubble that may eventually collapse. There is misallocation of capital by state enterprises, and rising discontent amongst a population that is still overwhelmingly poor. The government’s top priority is maintaining internal order and a “harmonious society” that keeps the Communist party elites in control. This is a bit tricky insofar as they have largely scrapped communist ideology in practice, but to be logically consistent they ought to do so officially, by rejecting Marxism as a foreign ideology and returning to Confucian roots. There has already been a revival of Confucianism, and a full embrace would legitimize the government in accordance with Chinese tradition. If this is accompanied by a merit system, rather than one that favors party functionaries, the government would be on solid ground, even if not democratic.

But in the long run, China will be outpaced by India. India is like a slow-moving elephant that has a long-term consistency once it is headed in the right direction. Its population will eventually pass China’s, and will be considerably younger due to China’s one-child policy. Even at a slower rate of growth in the long-term this means a larger economy. However, neither will be anywhere near the west on a per capita basis. Nor is it inevitable that the United States will be outproduced if we get our fiscal house in order, increase saving and investment, fix our dysfunctional education system, and encourage economic growth without bureaucratic obstacles. For this to happen we need a leadership that is optimistic and inspirational to move this country out of the current doldrums.

Written by georgesarant

January 28, 2011 at 10:08 PM

Posted in economy, international