Hire someone, or else...

I recently received a comment on my blog from Trenton Powers.   Naturally, when people comment on my blog and leave a backlink, I will go check out their blog.  Two posts on his blog are certainly worth discussing.

In one post he says this:

As a runner-up to the Milford Regional Chamber of Commerce Businessperson of The Year in 2007 I know a thing or two about business and economics. For instance I know that this purported letter from a conspicuously anonymous, alleged reader of the reactionary conservative rag, the National Review is hogwash:

Small business will start to hire when one big thing happens.Sales Growth. End of story.

This goes beyond simple intellectual dishonesty and charges head-first to the realm of deliberate misrepresentation.  There is no correlation between small business’ hiring practice and sales growth. Only the presence of robust regulation can create an environment conducive to increased employment opportunity in the private sector. By extension, government expansion is a necessity if one wishes to create a job-friendly atmosphere.

In another post he says this:

Just to take the previous post a step further, wouldn’t it fix a whole butt load of problems if government were to mandate that small business hire people if they earn profits above an arbitrary threshold?

For instance, its really not unreasonable for a family owned polymer-injection business, or a start-up pinking enterprise to be required to bring on another worker if that business makes more than $20,000 in profits, or they could be required to take on a migrant worker if they pass a $10,000 profit threshold.

This is not a bad idea.

You can see from the comments that I made, that I think that this is a bad idea.  Trenton defends this idea as outside the box thinking.  However, in the Age of Obama, I can’t think of a clearer example of knee-jerk, inside-the-box thinking than to conclude that the best way to solve a problem is government intervention.  I am curious what the readers of the Independent Bloghorn think of Trenton’s idea.

It’s nice to see that this new change in attitude hasn’t been lost on the treasury department.  Earlier this week, there were several news stories about certain institutions paying back their TARP money.  They were even going to pay back the money with some interest, hence the taxpayers were making a profit.  However, yesterday we learned that the wise stewards of TARP haven’t been the great investors the original stories made them out to be.  According to this story, a recent audit shows that taxpayers are showing a loss of $61 billion dollars on just the AIG and auto company bailouts.  This loss wipes out the $19.5 billion profit reported earlier this week.

TARP

If a publicly traded private company engaged in this kind of behavior, it would be investigated for securities fraud.  If the public company of our government, whose stock is privately traded among various special interest groups, engages in this kind of financial reporting, nobody cares.  Also, if a company with a $700 billion market cap reported a $40 billion loss in one year, the market’s reaction would be swift and painful.  If Obama & Bush inc. loses this much money, there’s not much that can be done.  After all, there was so much resounding shareholder…I mean taxpayer support for Obama to buy off his supporters in the UAW with the auto bailout, that this is a bad investment that we are all going to have to live with.

Most presidents get out of office and build a library or something.  Obama should start an investment bank.

Helicopter Ben

Congress is currently creating a bill that would threaten the independence of the Federal Reserve.  Basically they want the Government Accountability Office to be able to audit federal reserve policies.

This is one of those things that most Americans probably don’t care about.  The fed was set up to be an independent institution, so that the tools of monetary and fiscal policies could be used without consideration to shortsighted political pressures like elections every two years.

You can agree or disagree with what the fed is doing, but it is hard to argue that it would be better for Congress to be able to intervene with the Fed and do things like set or even influence interest rates.

I am not sure where Congress gets so much confidence in their abilities to fix things.  One of the positive things about this bill was the response it produced from Bernanke:

Bernanke separately urged Congress and the administration to lay out a plan that would bring the budget deficit down to a “sustainable” level of 2 percent to 3 percent of gross domestic product, from a projected ratio of about 13 percent this year. Much of the shortfall stems from the $787 billion fiscal stimulus — which Bernanke said is too soon to judge for its effectiveness — and the Treasury’s financial-rescue efforts.

“Unless we demonstrate a strong commitment to fiscal sustainability, we risk having neither financial stability nor durable economic growth,” the Fed chairman said in his testimony.

Bernanke also outlined the Fed’s exit strategy from many of their bailout efforts.  We have yet to hear an exit strategy from Obama or Congress after they rushed into a quagmire of debt with no exit strategy.

A system of obligations that bound lords and their subjects in Europe during much of the Middle Ages. In theory, the king owned all or most of the land and gave it to his leading nobles in return for their loyalty and military service. The nobles in turn held land that peasants, including serfs, were allowed to farm in return for the peasants’ labor and a portion of their produce. Under feudalism, people were born with a permanent position in society. (See fief and vassal.)

Note: Today, the word feudal is sometimes used as a general term for a set of social relationships that seems unprogressive or out of step with modern society.

Where it was tempting to write another post juxtaposing my thoughts with phrases from the musical, Les Miserables, I have decided against this.  Nevertheless, it is nice to see that Obama isn’t stopping at Great Depression economic policies when it comes to unprogressive solutions to our economic crisis.

Apparently he is mulling a modern reinvention of the feudal system.  This passage is from Reuters:

U.S. government officials are weighing a plan that would let borrowers who have fallen behind on their mortgage payments avoid eviction by renting their homes instead, sources familiar with the administration’s thinking said on Tuesday.

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Landlord in Chief

This is a perfect example of liberal-feel-good policy.  How can we argue against a seemingly benign government putting the taxpayer’s neck on the line one more time to bail out improvident homeowners and their silly bankers?  I believe that we can safely assume that the feudaral government would be a benevolent landlord.  I am also pretty confident that Neo-Feudalism will have no negative unintended consequences.  It is very unlikely to incentivize people to quit their mortgages.  It is also unlikely to incentivize banks to continue to make bad loans.  It is also unlikely to artificially lower rental rates, thus wiping out whatever real estate investor class still exists in America.  It is also unlikely to perpetuate the downward spiral in housing prices that most economists agree needs to be reversed.  It certainly wouldn’t promote a greater sense of entitlement among average Americans.  It wouldn’t violate the 10th Amendment and further restrict state’s rights by replacing a local source of state revenue, property taxes, with a federal source of revenue, housing rental proceeds, to be divvied out to the states.  This policy will probably also help reduce the unemployment rate as delinquent homeowners are forced to live in their homes for years and are unable to uproot and find work elsewhere.  After all why go look for a job if your unemployment check now comes with a rent stipend that you can use to continue living in the house that used to be yours.

I also let most of the convicts in the prison system go and pretty much wiped out rehab programs and substance abuse problems.  It is now up to the surrounding states to make sure all of these drug-addicts and criminals stay in California.  I hear there are a lot of vacant homes, so I am sure they will find somewhere to squat.  The one exception, however, is the illegal immigrants in the prisons.  They will have to be deported.  I am a little disappointed that cutting prison programs was the only option to solve this problem.  Outsourcing criminal detention and drug rehab to countries like China, Cuba, Russia, or Mexico would be a cost effective way of dealing with criminals.  It would also be a pretty good deterrent to prevent crime.  

I also cut all the excess education programs.  Sorry, community colleges.  You were a nice idea, but this state has bigger problems.  I have good news for kids.  They get an extra week of summer.  I also cut Calgrants.  Sorry students, you will just have to go get some more student loans.  I am sure there are plenty of those to go around.

I wiped out most of the welfare programs.  The good news here is that by giving up these programs, California gives up over $3 billion in federal funds.  This will be a nice windfall for Obama, whose economic team is working relentlessly to try and cut $100 million from his $1.75 trillion budget – keep up the good work gentleman.  

I did a few one-time fixes.  Mostly the ones where the state government takes money from local governments.  I think California needs a little infighting.  

With the state workers, I didn’t do anything that was possibly illegal.

I got rid of all the general government expenses that I could.

I enabled tax witholding for independent contractors and raised taxes on alcohol, and …drumroll please…California now has a $289 million surplus.

This activity is a little flawed.  California recently passed extensive tax increases to cover the budget shortfall.  Not surprisingly, increasing taxes actually reduced tax revenues coming into the state, thus widening the shortfall.  I was a little disappointed that this interactive game didn’t have an option for tax cuts.  There are far more historical examples where tax cuts increase tax revenues than there are examples where tax increases increase revenues.

You can play the balance the budget game yourself here.

These banks were able to pay back the money because they were able to raise capital.  They were able to raise capital, because there is a lot of money right now sitting on the sidelines looking for safety.  Because of the moral hazard created by the government bailing out the banks, these banks now look like a safe investment even though the past behavior of the institutions indicates otherwise.  Also, it is increasingly becoming apparent that this bailout money was financed by future inflation.  So in defense of Chuckles and Jake, I guess I would have to say that I would rather deal with trivial things like economic moral hazards and inflation rather than the apocalyptic demise of our financial system.

However, that is if you limit to the bailout to the original one crafted by Bush and Paulson.  The system probably could have contained the inflationary effects of printing $700 billion.  This would have been like a nice dose of Viagra to an otherwise limpid economy.  The Obama administration is behaving like a bunch of teenagers who broke into Grampa Keynes medicine cabinet.

For example: 

Yet one more example of the viability of advanced computer modeling

This chart was used by Obama’s expert team of economist and their magical modeling computers to sell Obama’s stimulus plan.  Of course Obama was all over the news the other day promising that these jobs will come; after all, his experts with their magical computers are telling him so.  Meanwhile tax collection rates are plummeting because large numbers of people aren’t working, and Obama’s innocent little $1.75 trillion forcasted budget deficit will soon balloon to $2 trillion.  When most people’s incomes drop or disappear, they slow their spending.  Then again, most people haven’t reached the point of economic enlightenment that characterize democrats, where laws of economic scarcity can be mitigated with good intentions.

In conclusion, I am glad I was wrong and banks are paying back taxpayer money.  I just wish they were paying it back to someone else other than our prodigal political leaders.

I found a good blog that explores some of these ideas: Carter’s Second Term

I would prefer that the government get out of the picture, and the market can sort things out.  When centralized economic systems fail, it is proof that they don’t work.  When a capitalistic economic system fails, it is proof that the system is working.  When a centralized economic system fails, you end up with an insolvent government unable to provide entitlements to its dependent population (See bankrupt California for an example of the latest failure on socialism’s long list of failures).  When a capitalistic system fails, you end up with a new generation of entrepreneurs and innovators who discover how to create wealth again out of the failed assets of previously existing enterprises.  This process is painful, but in the long run it is very rewarding.

A debate ensued between myself and Chuckles, where I suggested that in a capitalist economy failing businesses, and yes even failing banks should fail.  Competitors will fill in the gaps.  To which Chuckles replied:

Lehman, Bear Sterns, and their ilk, there is nobody to step in and fill that void.

Well, I found an interesting article for Chuckles to read: Crisis Reshaping Wall Street.

This is perhaps my favorite passage:

“We have the opportunity to step into the shoes of a Bear Stearns or a Lehman,” said Lee Fensterstock, the chief executive of Broadpoint, a Manhattan firm that has hired more than 240 people since fall 2007, when the financial crisis started taking root. “We would never have been able to do this five years ago, but now, it’s as if all of Wall Street got turned upside down, and they shook out all these people.”

The article continues to explain that financial institutions that have taken government money are losing all of their best talent.  Of course who would blame them.  After the executives at AIG were publicly pilloried, and Congress voted to confiscate their legal earnings, why would you want to work for Obama inc.  This is bad news for the taxpayer, because the banks that were bought in our name by two equally stupid presidents will have a hard time correcting their ships without talented crew on board.  

If you haven’t read the letter from the AIG executive whose pay was voted away by Congress called, “Dear AIG, I quit!” then you should.  I say if Congress really had any balls, they shouldn’t just tell these bankers to commit suicide and take away all of their pay.  They should force them to continue working.  I propose a 90% punitive tax for five years on the new earnings of an employee who leaves a bank that received government money for a new job.  This would be an America that for once we could be proud of.  This would be an America that would embody the ideals so carefully enshrined in our constitution.  Come on Obama, it is time to take your ideas to their logical end.  Force these bankers to do your bidding.

I have been impressed with the measures taken to see that private capital replaces public capital in these industries as soon as possible, although time will tell whether this ends up to be the case.

I don’t know how much time Jake thought it would take to tell us whether the “impressive measures” being taken to see that private capital replaces public capital are working, but things aren’t looking good.  You can read the latest installment of Just Politics to find that certain banks are trying to give back their bailout money that they were forced to take, but the Obama administration won’t have any of that.  I will borrow the quote that Harrison cited from the WSJ:

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He’s been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with “adverse” consequences if its chairman persists. That’s politics talking, not economics.

Think about it: If Rick Wagoner can be fired and compact cars can be mandated, why can’t a bank with a vault full of TARP money be told where to lend? And since politics drives this administration, why can’t special loans and terms be offered to favored constituents, favored industries, or even favored regions? Our prosperity has never been based on the political allocation of credit — until now.

Of course the disturbing nature of these developments are only amplified as we dig into how cap n’ trade is going to work.  Enron, was the company that first came up with the brilliant idea of carbon offset derivatives.  Unfortunately they are no longer around to live the dream.  Now our friendly government owned financial institution, AIG, (how lucky we taxpayers are to have acquired this fine firm at a time when we need someone with demonstrable genius in trading complex financial instruments) is wanting to be a player in the cap and trade regulatory regime.  How else, other than through back-door taxation, is this company ever going to get the money to pay us back.  If imposing new taxes on us through cap and trade financial instruments is AIG’s plan for paying back the tax dollars that it took, then I guess all I can do is lament that people like Jake got suckered into voting for Obama.

While I am on the subject of old people being parted from their money, I received my annual update from the Social Security Administration.  The following is the exact text of an article that was printed right in the middle of the front page:

Will Social Security still be around when I retire?

Yes.  The Social Security taxes you now pay go into the Social Security Trust Funds and are used to pay benefits to current beneficiaries.  The Social Security Board of Trustees now estimates that based on current law, in 2041, the Trust Funds will be depleted.  Because people are living longer and the birth rate is low, the ratio of workers to beneficiaries is falling.  Therefore, the taxes that are paid by workers will not be enough to pay the full benefit amounts scheduled.

However, this does not mean that Social Security benefit payments would disappear.  Even if modifications to the program are not made, there would still be enough funds in 2041 from taxes paid by workers to pay about $780 for every $1,000 in benefits scheduled.

In other words, every dollar that I sink into social security will decrease at a value of -.77% for 32 consecutive years to be worth .78 cents on the dollar when I retire.  I know that nowadays this sounds like a pretty good investment.  I would argue, however, that speculative bouts of mass wealth destruction are far lest damaging than systemic ones.  It seems that the Social Security Administration believes this as well.  If you read the back of the newsletter, it is filled with drivel about how I need to start saving and if I can save just $5 a week then it will grow at 5% and be worth a ton of money when I retire.  There is even a chart showing me that if I save $25 a week with 5% annual growth, then it will be worth $165K when I retire.  Cool, where can I sign up for option B.

Basically the geniuses who run Social Security are telling me that I must pay them and lose $.22 on every dollar after 32 years, but if I save money and invest it to where it grows at a 5% annual rate than the same dollar will be worth $4.78 in 32 years.  How is this any less fraudulent than anything Bernie Madoff did?  At least his investors willingly chose to contribute money to his scam.  I guess the difference is that at least the Social Security Administration is telling us that their operation is just a big scam, but since they are letting us know then it is o.k.

The following quote from an article by Peter Wehner and Paul Ryan in the Wall Street Journal illustrates where we could be headed as Tweedle Dum leaves office and Tweedle Dumber is inaugurated:

The last several months are a foreshadowing of a new era of government activism, rather than an unfortunate but necessary (and anomalous) emergency action. We will soon shift from a market-based economy to a political one in which the government picks winners and losers and extends its reach and power in unprecedented ways.

If you didn’t read the article that I linked above, you probably ought to.  Especially if you are someone who is frightened by the government’s recent desire to get involved in some of our most important industries. 

Doesn’t anyone else seem to be a little worried that the government is bailing out financial institutions, auto companies, and if you got enough hope, maybe the health care industry.  The government is targeting only the industries that will create the most dependence.  You don’t see the government targeting retail stores and restaurants with their bailout measures, because people don’t rely on these industries like they do the financial and healthcare industries.  The government only wants to play in the industries where it can create dependent citizens out of us.

I would prefer that the government get out of the picture, and the market can sort things out.  When centralized economic systems fail, it is proof that they don’t work.  When a capitalistic economic system fails, it is proof that the system is working.  When a centralized economic system fails, you end up with an insolvent government unable to provide entitlements to its dependent population (See bankrupt California for an example of the latest failure on socialism’s long list of failures).  When a capitalistic system fails, you end up with a new generation of entrepreneurs and innovators who discover how to create wealth again out of the failed assets of previously existing enterprises.  This process is painful, but in the long run it is very rewarding.

The big story this weekend is that Circuit City is going out of business and going to liquidate its assets.  Read this article for a great rundown of why this happened.  I especially like the graph at the bottom of the article that explains why Circuit City failed.  Would it be better for the government to get involved here, or would it be better for Costco and Best Buy and Walmart to reap the rewards for better running their businesses?

It would be nice to see our government, which is no stranger to failure, recognize that failure happens, and that failure is an option in a capitalistic economy.