Noticed food prices lately? Or perhaps the price of gas at the pump has caught your attention. You probably didn't know that raw cotton is up 180 percent since a year ago. Guess where that will take clothing prices. Think deflation is our problem, think again. Inflation is here.
US monetary policy and US debt policy hinge on the assumption of deflation. So much for those policies. Be prepared for major increases in treasury rates which means a dramatic and unanticipated increased in annual federal fiscal deficits. Things are going to get a lot worse quickly.
Bernanke and Obama are going to reap the results that their policies have sowed. A return to the Carter days -- stagflation is back. The stock and bond markets will struggle from here.
Friday 25 February 2011
Thursday 24 February 2011
Saving for a rainy day
This week, February 20-26, 2011, is America Saves Week and I would like to write about the importance of precautionary saving.
One of the most worrisome statistics from the 2009 FINRA Financial Capability Study is that, when asked whether they had said aside sufficient funds to cover expenses for three months in case of sickness, job loss, economic downturn or other emergency, 51% of respondents (in a sample representative of America) said they do not have such precautionary funds. The crisis may have depleted some of these funds, but not having a buffer stock of savings exposes both the individual and the economy not only to a large shock but also to a small shock, such as the car breaking down, the house needing a small repair, or a sudden out of pocket health cost. And with unemployment rates as high as 10%, the lack of precautionary saving makes people not just vulnerable but also hit hard by the loss of their job.
The expansion of the opportunities to borrow may give the idea that, if an emergency arises, one can turn to credit cards or find other ways to borrow. The problem is that, in a moment of need, borrowing at high interest rates is not only problematic, but can turn quickly into higher costs and fees if one were to miss a payment, go over the limit, or use the card as a cash advance. Turning to payday lenders or similar types of loans would only further increase the cost of borrowing. The problem with these methods is that they do not provide insurance at all. One wants an instrument, like saving, that can help in time of needs, not turn to an instrument that becomes pricey when most in need.
Because it deals with emergencies that happen unexpectedly, these funds are better be liquid. One does not want to sell possessions: a car, the home, or other such items when faced with a shock. Even selling stocks may come with a stiff cost if one has to sell when the market is down. As we have experienced in the past few years, having high unemployment when the stock market plunged only accentuates the pain of job loss.
This principle is perhaps so important that even Aesop illustrates it in a fable known as The Ant and the Grasshopper. The fable concerns a grasshopper that has spent the warm months singing while the ant worked to store up food for winter. Sure enough when the winter came, the grasshopper found himself in great difficulty. I would say there are not many cases when economics crosses path with literature, but it is great when it happens. As the story says perhaps better than any equation I would write, it is a good idea to store up a little bit for those winter rainy days.
If you want to look at the statistics about who has saving for a rainy day, here is the link to the state-by-state Financial Capability Study data: http://www.usfinancialcapability.org/
One of the most worrisome statistics from the 2009 FINRA Financial Capability Study is that, when asked whether they had said aside sufficient funds to cover expenses for three months in case of sickness, job loss, economic downturn or other emergency, 51% of respondents (in a sample representative of America) said they do not have such precautionary funds. The crisis may have depleted some of these funds, but not having a buffer stock of savings exposes both the individual and the economy not only to a large shock but also to a small shock, such as the car breaking down, the house needing a small repair, or a sudden out of pocket health cost. And with unemployment rates as high as 10%, the lack of precautionary saving makes people not just vulnerable but also hit hard by the loss of their job.
The expansion of the opportunities to borrow may give the idea that, if an emergency arises, one can turn to credit cards or find other ways to borrow. The problem is that, in a moment of need, borrowing at high interest rates is not only problematic, but can turn quickly into higher costs and fees if one were to miss a payment, go over the limit, or use the card as a cash advance. Turning to payday lenders or similar types of loans would only further increase the cost of borrowing. The problem with these methods is that they do not provide insurance at all. One wants an instrument, like saving, that can help in time of needs, not turn to an instrument that becomes pricey when most in need.
Because it deals with emergencies that happen unexpectedly, these funds are better be liquid. One does not want to sell possessions: a car, the home, or other such items when faced with a shock. Even selling stocks may come with a stiff cost if one has to sell when the market is down. As we have experienced in the past few years, having high unemployment when the stock market plunged only accentuates the pain of job loss.
This principle is perhaps so important that even Aesop illustrates it in a fable known as The Ant and the Grasshopper. The fable concerns a grasshopper that has spent the warm months singing while the ant worked to store up food for winter. Sure enough when the winter came, the grasshopper found himself in great difficulty. I would say there are not many cases when economics crosses path with literature, but it is great when it happens. As the story says perhaps better than any equation I would write, it is a good idea to store up a little bit for those winter rainy days.
If you want to look at the statistics about who has saving for a rainy day, here is the link to the state-by-state Financial Capability Study data: http://www.usfinancialcapability.org/
Wednesday 23 February 2011
What Happened to Robin Hood?
In Madison, thousands of high income folks are busy demonstrating in the hopes that lower and middle income taxpayers will pay higher taxes to keep these rich folks riding high. The average teacher in Wisconsin makes between two and three times the all-in compensation of the average Wisconsin taxpayer, so, by all means, lets raise taxes and make the gap even higher. To show their concern for their students, the Wisconsin teachers have taken to calling in sick while they are demonstrating in the state capital for even more money.
Meanwhile, the state faces an immediate $ 3.6 billion shortfall and will be forced to begin laying off teachers next week. Why don't the demonstrating teachers care about the pending layoffs? Because the ones demonstrating will not be the ones laid off. The ones laid off will be the most recently hired teachers with the least seniority and these teachers aren't paid as well or have as much seniority as the ones wreaking havoc in Madison. The rich teachers are protected by seniority rules.
Just imagine a couple both of whom have been school teachers in Wisconsin for twenty years and have a combined compensation exceeding $ 250,000 annually. These are the people demonstrating. These are the people that are not showing up in the classroom even though paid (handsomely) to do so.
Where is Robin Hood? He needs to ride in and support the taxpayer against these rich folks who are robbing the public treasury and not showing up for work.
Student demonstrators, as usual, are supporting the relatively affluent against the interests of the average citizen. No change there.
Meanwhile, the state faces an immediate $ 3.6 billion shortfall and will be forced to begin laying off teachers next week. Why don't the demonstrating teachers care about the pending layoffs? Because the ones demonstrating will not be the ones laid off. The ones laid off will be the most recently hired teachers with the least seniority and these teachers aren't paid as well or have as much seniority as the ones wreaking havoc in Madison. The rich teachers are protected by seniority rules.
Just imagine a couple both of whom have been school teachers in Wisconsin for twenty years and have a combined compensation exceeding $ 250,000 annually. These are the people demonstrating. These are the people that are not showing up in the classroom even though paid (handsomely) to do so.
Where is Robin Hood? He needs to ride in and support the taxpayer against these rich folks who are robbing the public treasury and not showing up for work.
Student demonstrators, as usual, are supporting the relatively affluent against the interests of the average citizen. No change there.
Friday 18 February 2011
Some questions about financial literacy
A reporter from Germany contacted me recently to discuss financial literacy. Because we were not able to speak on the phone, she sent me her questions and asked that I write back to her. Since these are very general and important question, I thought I would also post them on my blog. Here they are:
1. How much do Americans know about finance? Do you have actual research results that show that there is a lot that needs to be improved?
For several years and in many published papers I have documented the lack of financial literacy among Americans. I would like to describe the most recent results, which I presented to the Financial Crisis Inquiry Commission last year and which are part of a new survey, the Financial Capability Study, by FINRA Investor Education Foundation in collaboration with the U.S. Treasury. According to that survey, less than half of Americans can correctly answer two simple questions about interest rates and inflation, and only 30% of Americans can correctly answer these two questions and a question about risk diversification. As I mentioned when I testified to the Commission (a link to my presentation and the full report on the findings of the Financial Capability Study are below), these levels of financial illiteracy are very worrisome.
Link to report prepared for the Financial Crisis Inquiry Commission:
http://c0182412.cdn1.cloudfiles.rackspacecloud.com/2010-0226-Lusardi.pdf
link to the video presentation:
http://www.fcic.gov/videos/view/11
2. What do you regard as the main causes for a lack of financial literacy in America?
In America, as in other countries, changes in demographics (aging of the population and reduced fertility), increased mobility in labor markets (by the time workers turn 35, they have already held many jobs and they need to have portable pensions), and changes in financial markets have shifted the responsibility of financial well-being from the government and employers onto individuals. However, this has not been accompanied by changes in school curricula or workplace programs to equip people to deal with increased personal financial responsibility. In other words, it is not the case that financial knowledge is getting worse, simply that the world has changed and is still changing rapidly. The financial knowledge people are equipped with is inadequate to deal with the complexities of the current financial system and market structure.
3. What is it that makes financial literacy so important?
What makes financially literacy so important are the many changes we are experiencing in the following areas:
1) The pension system. Pensions have been shifting from defined benefit to defined contribution programs. As a result of this shift, workers are now in charge of deciding how much to save and how to allocate their pension wealth. Moreover, when they retire, they are in charge of decumulation of their pension wealth, and have to make decisions such as whether to annuitize or to take their pension as a lump sum: a very difficult decision with important consequences for financial well-being after retirement.
2) Financial markets. Consumers are confronted with much more complex financial instruments than ever before; consider, for example, adjustable rate mortgages or mutual funds that invest in foreign markets.
3) Opportunities to borrow. Opportunities to borrow have increased dramatically in recent years. One of the features of credit cards and sub-prime mortgages is that decisions about how much to borrow are entirely in the hands of borrowers. One can borrow a very large amount on credit cards simply by using more and more cards. Similarly, with sub-prime mortgages banks were leaving the decision of how much to borrow in the hands of the borrowers. In these situations, it is important that the borrower is financially literate and can understand key concepts such as interest compounding.
4. What are the difficulties when you want to improve the financial literacy of the American citizens?
Improving financial literacy requires a consistent set of programs aimed at different groups of the population. We cannot necessarily bring adults into the classroom, but we can and should provide financial literacy in schools to prepare young people for the new world they are facing. Most adults would fare better with programs at work (this is where workers are and where they often have to make financial decisions). It is difficult to coordinate all of these efforts and engage the various institutions that should be part of a consistent strategy to improve financial literacy, from the Department of Education to the U.S. Treasury to the regulators to the business community. Moreover, education and programs require resources. Education is going to deliver results in the long run, yet very few politicians or institutions have a long-run horizon.
As an aside, when presenting my research and work on financial literacy and financial education, I used to receive objections from people who insisted that financial education is too expensive. I think that the financial crisis has shown us that it is too expensive NOT to do financial education.
5. Do you think that politicians give enough attention and efforts to this issue?
Some politicians do, and they need to be praised for that. I travel a lot and give talks in many countries, and I think that several countries have become aware that they need to address the problem of financial illiteracy, as they will end up paying for it one way or another. For example, lack of financial literacy can mean costlier welfare benefits for some groups, and some countries understand that prevention is cheaper than the massive costs incurred when crises erupt.
6. With great interest I have read your current blog entry about two new videogames called "Bite Club" and "Farm Blitz", which were developed by Doorways to Dreams Fund. How do you promote these videogames in order to make sure that many people play these games and gain knowledge? Do you know anything about the success of the former games Groove Nation and Celebrity Calamity?
These games were targeted to a specific subgroup of the U.S. population. As a result, they will be distributed at places such as Walmart stores. Of course, we can’t force anyone to play, so the game creators have used social marketing techniques to encourage play and have made sure the game is as fun and engaging as other popular online games. We have submitted proposals to formally and rigorously evaluate the effectiveness of these games, and we will know soon how effective they are. So far, we have done a qualitative evaluation via focus groups and in-depth interviews. It is very important to know what works and what does not work in financial education. This why the projects we do at the Financial Literacy Center always have an evaluation component built into them. Please look at the projects we have completed in year one and the new projects we are doing in year two:
http://www.financialliteracyfocus.org/academics/projects.html
1. How much do Americans know about finance? Do you have actual research results that show that there is a lot that needs to be improved?
For several years and in many published papers I have documented the lack of financial literacy among Americans. I would like to describe the most recent results, which I presented to the Financial Crisis Inquiry Commission last year and which are part of a new survey, the Financial Capability Study, by FINRA Investor Education Foundation in collaboration with the U.S. Treasury. According to that survey, less than half of Americans can correctly answer two simple questions about interest rates and inflation, and only 30% of Americans can correctly answer these two questions and a question about risk diversification. As I mentioned when I testified to the Commission (a link to my presentation and the full report on the findings of the Financial Capability Study are below), these levels of financial illiteracy are very worrisome.
Link to report prepared for the Financial Crisis Inquiry Commission:
http://c0182412.cdn1.cloudfiles.rackspacecloud.com/2010-0226-Lusardi.pdf
link to the video presentation:
http://www.fcic.gov/videos/view/11
2. What do you regard as the main causes for a lack of financial literacy in America?
In America, as in other countries, changes in demographics (aging of the population and reduced fertility), increased mobility in labor markets (by the time workers turn 35, they have already held many jobs and they need to have portable pensions), and changes in financial markets have shifted the responsibility of financial well-being from the government and employers onto individuals. However, this has not been accompanied by changes in school curricula or workplace programs to equip people to deal with increased personal financial responsibility. In other words, it is not the case that financial knowledge is getting worse, simply that the world has changed and is still changing rapidly. The financial knowledge people are equipped with is inadequate to deal with the complexities of the current financial system and market structure.
3. What is it that makes financial literacy so important?
What makes financially literacy so important are the many changes we are experiencing in the following areas:
1) The pension system. Pensions have been shifting from defined benefit to defined contribution programs. As a result of this shift, workers are now in charge of deciding how much to save and how to allocate their pension wealth. Moreover, when they retire, they are in charge of decumulation of their pension wealth, and have to make decisions such as whether to annuitize or to take their pension as a lump sum: a very difficult decision with important consequences for financial well-being after retirement.
2) Financial markets. Consumers are confronted with much more complex financial instruments than ever before; consider, for example, adjustable rate mortgages or mutual funds that invest in foreign markets.
3) Opportunities to borrow. Opportunities to borrow have increased dramatically in recent years. One of the features of credit cards and sub-prime mortgages is that decisions about how much to borrow are entirely in the hands of borrowers. One can borrow a very large amount on credit cards simply by using more and more cards. Similarly, with sub-prime mortgages banks were leaving the decision of how much to borrow in the hands of the borrowers. In these situations, it is important that the borrower is financially literate and can understand key concepts such as interest compounding.
4. What are the difficulties when you want to improve the financial literacy of the American citizens?
Improving financial literacy requires a consistent set of programs aimed at different groups of the population. We cannot necessarily bring adults into the classroom, but we can and should provide financial literacy in schools to prepare young people for the new world they are facing. Most adults would fare better with programs at work (this is where workers are and where they often have to make financial decisions). It is difficult to coordinate all of these efforts and engage the various institutions that should be part of a consistent strategy to improve financial literacy, from the Department of Education to the U.S. Treasury to the regulators to the business community. Moreover, education and programs require resources. Education is going to deliver results in the long run, yet very few politicians or institutions have a long-run horizon.
As an aside, when presenting my research and work on financial literacy and financial education, I used to receive objections from people who insisted that financial education is too expensive. I think that the financial crisis has shown us that it is too expensive NOT to do financial education.
5. Do you think that politicians give enough attention and efforts to this issue?
Some politicians do, and they need to be praised for that. I travel a lot and give talks in many countries, and I think that several countries have become aware that they need to address the problem of financial illiteracy, as they will end up paying for it one way or another. For example, lack of financial literacy can mean costlier welfare benefits for some groups, and some countries understand that prevention is cheaper than the massive costs incurred when crises erupt.
6. With great interest I have read your current blog entry about two new videogames called "Bite Club" and "Farm Blitz", which were developed by Doorways to Dreams Fund. How do you promote these videogames in order to make sure that many people play these games and gain knowledge? Do you know anything about the success of the former games Groove Nation and Celebrity Calamity?
These games were targeted to a specific subgroup of the U.S. population. As a result, they will be distributed at places such as Walmart stores. Of course, we can’t force anyone to play, so the game creators have used social marketing techniques to encourage play and have made sure the game is as fun and engaging as other popular online games. We have submitted proposals to formally and rigorously evaluate the effectiveness of these games, and we will know soon how effective they are. So far, we have done a qualitative evaluation via focus groups and in-depth interviews. It is very important to know what works and what does not work in financial education. This why the projects we do at the Financial Literacy Center always have an evaluation component built into them. Please look at the projects we have completed in year one and the new projects we are doing in year two:
http://www.financialliteracyfocus.org/academics/projects.html
Wednesday 16 February 2011
Bernanke is a Political Hack
Ben Bernanke is likely the worst Fed Chairman in US history and that's saying something. We have had some really bad ones, but none like this guy. He has now purchased nearly $ 400 billion of his $ 900 billion QE2 buying spree. If he doesn't buy, who will? That's a question that is getting asked a lot lately.
Now Ben has opined on the Dodd-Frank bill, probably the second worst piece of legislation in American history (Obamacare is the winner of the gold). Ben likes the Dodd-Frank bill, otherwise known as FinReg. FinReg is one of the key contributors to our high unemployment rates. So, I guess it is having an impact. It is certainly not irrelevant. The mountain of new rules, regulations and prohibitions have done their job. They have stifled credit creation and muzzled the financial system.
Ben and Obama have a lot in common. Their policies are both significant contributors to our current stagnation and high unemployment.
Now Ben has opined on the Dodd-Frank bill, probably the second worst piece of legislation in American history (Obamacare is the winner of the gold). Ben likes the Dodd-Frank bill, otherwise known as FinReg. FinReg is one of the key contributors to our high unemployment rates. So, I guess it is having an impact. It is certainly not irrelevant. The mountain of new rules, regulations and prohibitions have done their job. They have stifled credit creation and muzzled the financial system.
Ben and Obama have a lot in common. Their policies are both significant contributors to our current stagnation and high unemployment.
The Real Tragedy of State and Local Employees
State and local government employees face signficant layoffs and dramatic reductions in their benefit packages. Why? The unions claim that the reason is the stingy taxpayer, who, in most states, makes less average compensation than the employees that the taxpayer is funding. The real problem is excessive promises by the union leadership, encoded into law by governors, state legislatures and local governments. There has never been any realistic chance that these benefits could be paid for...never. This grand plan only worked as a ponzi scheme, providing benefits to the early recipients until the cold hard facts of demographics revealed the fraudulent nature of the promises.
The great tragedy is that all of this fooled the employees. They assumed that they would be provided abundant retirement income and medical benefits. Thus, there was no need to save. They could spend with abandon and they did. Now, the day of reckoning has arrived and there is no money to pay the promises of the past and no savings to make up for it. That is the real tragedy. People believed these false promises of government and thus did not save and prepare for the future. That is the main reason that the US has the lowest savings rate in the developed world. They think they will be bailed out. Now they are learning that there are no resources available to deal with this problem.
False promises abound in the entitlement arena. President Obama's refusal to address this problem in his recent budget demonstrates the cynicism of the modern American political leadership.
The great tragedy is that all of this fooled the employees. They assumed that they would be provided abundant retirement income and medical benefits. Thus, there was no need to save. They could spend with abandon and they did. Now, the day of reckoning has arrived and there is no money to pay the promises of the past and no savings to make up for it. That is the real tragedy. People believed these false promises of government and thus did not save and prepare for the future. That is the main reason that the US has the lowest savings rate in the developed world. They think they will be bailed out. Now they are learning that there are no resources available to deal with this problem.
False promises abound in the entitlement arena. President Obama's refusal to address this problem in his recent budget demonstrates the cynicism of the modern American political leadership.
The Obama Budget
Apparently the Obama Administration has forgotten the results of the November election. The new Obama budget proposal unveiled this week brings back all of the same, tired, big government plans that the President has been pushing since the day he took office. It no longer matters to the President that the recovery is producing no jobs. He has grown used to that fact, apparently. Now, the President plans new spending initiatives to expand on policies that have few supporters even in his own party. The President is becoming more and more irrelevant. Perhaps that is the plan.
Meanwhile major budget cuts are being pushed by the President's opponents in the House of Representatives and even entitlement cuts are under consideration. While there may be zero presidential leadership, there are some good signs that the House of Representatives is not asleep and may supply the leadership that the White House seems incapable of providing.
The President seems bent on using today's fiscal crisis as an opportunity to force Republicans to make unpopular budget decisions. Then, I suppose, he will defend all of this spending and coast to a second term come next year. So much for Obama's view of "winning the future." His budget proposal is a sham.
Meanwhile major budget cuts are being pushed by the President's opponents in the House of Representatives and even entitlement cuts are under consideration. While there may be zero presidential leadership, there are some good signs that the House of Representatives is not asleep and may supply the leadership that the White House seems incapable of providing.
The President seems bent on using today's fiscal crisis as an opportunity to force Republicans to make unpopular budget decisions. Then, I suppose, he will defend all of this spending and coast to a second term come next year. So much for Obama's view of "winning the future." His budget proposal is a sham.
Tuesday 15 February 2011
Annie Sullivan of personal finance
Beth Kobliner wrote in her most recent blog post that I am the Annie Sullivan of personal finance. I have received praise for my work, but this is the best I’ve ever gotten. I must say that the association with Anne Sullivan almost made me cry (yes, you students who took my classes, I do have a heart). It is very humbling and is also giving me energy to do more.
I am deeply honored and gratified by Beth Kobliner’s praise, but I want to point out that she is doing some truly excellent work to benefit young people. While I write a blog—not as often as I would like—and do research work on financial literacy, Beth Kobliner has written a best-selling book geared to helping young adults make good financial decisions and has been very active in youth financial education. In recognition of her important work, President Obama nominated her to the President’s Advisory Council on Financial Capability. The Council has held their first meeting this year, and Beth is already very active in its Youth Education Subcommittee.
Every day we have a chance to make a small difference in improving financial literacy. Someone said, “People seldom see the halting and painful steps by which the most insignificant success is achieved.” That someone was Anne Sullivan.
Here is a link to Beth Kobliner’s blog:
http://www.bethkobliner.com/beths-blog/tag/financial-capability
I am deeply honored and gratified by Beth Kobliner’s praise, but I want to point out that she is doing some truly excellent work to benefit young people. While I write a blog—not as often as I would like—and do research work on financial literacy, Beth Kobliner has written a best-selling book geared to helping young adults make good financial decisions and has been very active in youth financial education. In recognition of her important work, President Obama nominated her to the President’s Advisory Council on Financial Capability. The Council has held their first meeting this year, and Beth is already very active in its Youth Education Subcommittee.
Every day we have a chance to make a small difference in improving financial literacy. Someone said, “People seldom see the halting and painful steps by which the most insignificant success is achieved.” That someone was Anne Sullivan.
Here is a link to Beth Kobliner’s blog:
http://www.bethkobliner.com/beths-blog/tag/financial-capability
Saturday 12 February 2011
Egypt -- Politics and Economics
Now that Mubarak has left, the media is trumpeting that Egypt is now "free." That's not a likely result. The military, who has ousted Mubarek and assumed control, owns a huge share of Egyptian business and industry -- estimates range from one-third to to one-half of the entire Egyptian economy is directly owned by the group that now has power in Egypt. Will they give up that power? Not likely.
What this means is that economic freedom will remain in short supply in Egypt. New politicians will appear and there will be elections, but the things that can make a difference to the lives of ordinary Egyptians will not be on the ballot. Egyptians need economic development. They need the freedom to start new businesses, educate their children and live in an economy that produces jobs.
The fundamental need in Arab countries is economic freedom, not the right to vote themselves into an Iranian-like theocracy or a Venezuelan-like monocracy. This does not mean that Mubarak is better than democracy. Democracy is definitely better than Mubarak. Democracy, without economic freedom does not produce economic growth (even though economic freedom without democracy can produce economic growth -- check out Singapore and parts of modern day China).
The Arab lands need economic freedom for their citizenry. The curse of oil has robbed the Arab countries of a middle class and made every Arab country the land of the rich and poor. Education, economic freedom and economic opportunity are the ticket, not the right to choose between various opportunists looking to cash in on Egypt's new found freedom.
As long as the military is Egypt's savior, the Egyptian people cannot be saved.
What this means is that economic freedom will remain in short supply in Egypt. New politicians will appear and there will be elections, but the things that can make a difference to the lives of ordinary Egyptians will not be on the ballot. Egyptians need economic development. They need the freedom to start new businesses, educate their children and live in an economy that produces jobs.
The fundamental need in Arab countries is economic freedom, not the right to vote themselves into an Iranian-like theocracy or a Venezuelan-like monocracy. This does not mean that Mubarak is better than democracy. Democracy is definitely better than Mubarak. Democracy, without economic freedom does not produce economic growth (even though economic freedom without democracy can produce economic growth -- check out Singapore and parts of modern day China).
The Arab lands need economic freedom for their citizenry. The curse of oil has robbed the Arab countries of a middle class and made every Arab country the land of the rich and poor. Education, economic freedom and economic opportunity are the ticket, not the right to choose between various opportunists looking to cash in on Egypt's new found freedom.
As long as the military is Egypt's savior, the Egyptian people cannot be saved.
Monday 7 February 2011
Obama and the Middle Class
In his speech today before the US Chamber of Commerce, Obama lectured his audience that gains must be shared with the middle class. He points to the eroding take-home income of middle class Americans.
But, there is nothing business can do about the plight of the middle class. That is pretty much determined by Congressionally imposed mandates on businesses. Imagine that you pay an employee $ 40,000 per year and that productivity improves enough to pay that employee $ 50,000 per year. Why wouldn't you do it? Because, in the meantime, Congress has passed a law permitting that employee to sue you for millions of dollars if another employee makes an off-color comment to another employee at the water fountain (or for that matter, off company premises and after hours....it doesn't matter under the law). Now the employee isn't worth $ 50,000 to you. Business has to factor in the potential cost of litigation (and, of course, they do). In fact, the litigation threat may be so costly to your business that you may simply terminate the employee, even though, absent the litigation benefits enacted by Congress, you would have been more than happy to pay the employee $ 50,000 (and hire more of them to boot).
Congress has punished the middle class with employer mandates. Congress has made much of the middle class economically toxic to American business. Obama need look no further than into the mirror to see the group that is responsible for damaging the prospects of the American middle class.
But, there is nothing business can do about the plight of the middle class. That is pretty much determined by Congressionally imposed mandates on businesses. Imagine that you pay an employee $ 40,000 per year and that productivity improves enough to pay that employee $ 50,000 per year. Why wouldn't you do it? Because, in the meantime, Congress has passed a law permitting that employee to sue you for millions of dollars if another employee makes an off-color comment to another employee at the water fountain (or for that matter, off company premises and after hours....it doesn't matter under the law). Now the employee isn't worth $ 50,000 to you. Business has to factor in the potential cost of litigation (and, of course, they do). In fact, the litigation threat may be so costly to your business that you may simply terminate the employee, even though, absent the litigation benefits enacted by Congress, you would have been more than happy to pay the employee $ 50,000 (and hire more of them to boot).
Congress has punished the middle class with employer mandates. Congress has made much of the middle class economically toxic to American business. Obama need look no further than into the mirror to see the group that is responsible for damaging the prospects of the American middle class.
Knocking Down Barriers
President Obama, speaking before the US Chamber of Commerce today, said that he would "knock down" barriers that hamper economic growth.
Well, for starters, how about repealing all of the enacted legislation from the 2009-2010 Congress. That would be a good beginning. In the process, away would go FinReg, Credit Card Reform, and Obamacare among other things.
If the president is serious, then the road is clear. All he needs to do is a complete about face. Anything else is just politics as usual.
Well, for starters, how about repealing all of the enacted legislation from the 2009-2010 Congress. That would be a good beginning. In the process, away would go FinReg, Credit Card Reform, and Obamacare among other things.
If the president is serious, then the road is clear. All he needs to do is a complete about face. Anything else is just politics as usual.
Saturday 5 February 2011
Unintended Consequences
The economic recovery in the US is stillborn. All the various "initiatives" enacted by the Congress since September of 2008 have virtually guaranteed that the economy cannot have a robust recovery, the kind of recovery that, from previous recessions brought the economy back to full strength. Instead, the new credit rules, the new financial regulations, the new health care mandates, the new tax gimmicks, and the business-demonizing atmosphere of the Obama Administration all serve to slow down economic recovery and to create long term stagnation in employment and economic growth.
The Administration seems truly puzzled by all of this. The lame duck session, extending the Bush tax cuts for two years, simply avoided disaster. The tax cut extension, since it is a temporary two year extension, cannot possibly stimulate the economy in any meaningful way. Changing the rhetoric in the White House is certainly an improvement but is totally inadequate given the enactment of legislation in 2009 and 2010 that shackles businesses and makes adding employees prohibitively expensive.
Businesses can be seen as growth engines and employment generators or they can be seen as purveyors of social causes. They can't do both. More and more,American business is expected to avoid profit maximizing behavior and be good citizens, promoting various social causes. Being good social citizens and promoting social causes inevitably means growing slower, hiring fewer employees and being less dynamic. That's where we are. The "green jobs" rhetoric is nothing more than rhetoric.
It is time to set aside "feel good" rhetoric and create a business environment favorable to jobs creation. So far, the President doesn't seem to get it. He seems genuinely surprised that American business, reeling from the blows of his policies and rhetoric, isn't racing to create jobs and rescue his presidency.
If your main economic banner is "no tax cuts for the rich," then economic stagnation is probably your future. What is needed is the elimination of the numerous barriers to economic prosperity that the Obama Administration and a compliant (and long gone) Congress put in place. What is needed is no less than a complete dismantling of the legislation passed in the last two years by the Congress. Then and only then can a truly vibrant economy take over.
The Administration seems truly puzzled by all of this. The lame duck session, extending the Bush tax cuts for two years, simply avoided disaster. The tax cut extension, since it is a temporary two year extension, cannot possibly stimulate the economy in any meaningful way. Changing the rhetoric in the White House is certainly an improvement but is totally inadequate given the enactment of legislation in 2009 and 2010 that shackles businesses and makes adding employees prohibitively expensive.
Businesses can be seen as growth engines and employment generators or they can be seen as purveyors of social causes. They can't do both. More and more,American business is expected to avoid profit maximizing behavior and be good citizens, promoting various social causes. Being good social citizens and promoting social causes inevitably means growing slower, hiring fewer employees and being less dynamic. That's where we are. The "green jobs" rhetoric is nothing more than rhetoric.
It is time to set aside "feel good" rhetoric and create a business environment favorable to jobs creation. So far, the President doesn't seem to get it. He seems genuinely surprised that American business, reeling from the blows of his policies and rhetoric, isn't racing to create jobs and rescue his presidency.
If your main economic banner is "no tax cuts for the rich," then economic stagnation is probably your future. What is needed is the elimination of the numerous barriers to economic prosperity that the Obama Administration and a compliant (and long gone) Congress put in place. What is needed is no less than a complete dismantling of the legislation passed in the last two years by the Congress. Then and only then can a truly vibrant economy take over.
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