The Liberty School

The effects of uncertainty

Today the Wall Street Journal has a great piece highlighting the absurdity of short-term fiscal policies:

Now Congress, taking up a deal worked out between the Obama administration and Republican leaders, is poised to turn the whole personal income-tax system into something of a temporary structure. The plan embraces a broad range of provisions—an extension of Bush-era rates, a new estate-tax formula—but for only two years. A payroll-tax cut in the bill is for a single year.

This means that if the compromise passes largely intact, the U.S. will have no permanent regime governing levies on salaries, capital gains and dividends, the Social Security tax, as well as a slew of targeted breaks for families, students and other groups. This on top of dozens of corporate-tax provisions that already were subject to annual renewal.

The level of uncertainty, unusual for developed nations, complicates planning and discourages hiring and investment, many economists and corporate executives say.

Couple that with the Washington Post reporting that businesses are squatting on $1.8 trillion in cash and you get a perfect example of the effects of economic uncertainty. Asinine government policies, both fiscal and monetary (and then some), are leaving companies extremely unsure of the economic climate to come. With portions of ObamaCare not set to take effect until as late as 2018 and bipartisan control of Congress coming in 2011, I wouldn’t expect any degree of assurance any time soon.

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Filed under: Economics, Politics,

South Korea caves to US protectionism

Recently there has much much ado about the trade agreement between the US and South Korea. Unfortunately an egregious error is being made by many people who have called the deal a “free-trade” agreement. It is anything but.

Merriam-Webster dictionary defines ‘free’ as “having no trade restrictions” and “not obstructed, restricted, or impeded.”

Instead of standing up for true free trade, one that eliminates all impediments to an open flow of goods and services, the South Koreans gave in to President Obama and his union cronies’ demand for protectionism. This deal has nothing to do with free trade and everything to do with protecting American auto makers from foreign competition. The deal lowers export tariffs on American-made vehicles from 8% to 4% while the 2.5% tax on imported Korean-made cars, originally set to expire immediately in the Bush-era version of the agreement, is allowed to remain. Itl also cuts the entire 10% South Korean tariff on American trucks while maintaining the whopping 25% tariff on imports of South Korean trucks.

Speaking about the deal, President Obama said that “this agreement shows the U.S. is willing to lead and compete in the global economy.” If American automakers were willing to “compete in a global economy” they would not support barriers that prevent their competitors from selling their goods at a cheaper price in their backyard. It is precisely because they are unwilling to compete that they seek to stifle the competition by installing impediments to competition.

Filed under: Economics, Politics, ,

The NYT wants another housing bubble

Because the housing market isn’t recovering from the folly of government intrusion at break-neck speed, the New York Times is calling for…more government intrusion:

Mortgage rates are averaging 4.3 percent for a 30-year fixed-rate loan, and the Federal Reserve is considering pushing them even lower. In theory, those low rates should unleash a wave of refinancings, giving homeowners and the economy a boost.

Here is the catch: Millions of people who are current in their payments cannot qualify for low-rate refinancing because their home values or credit scores have declined during the recession.

That is bad news for everyone. But there is a way out. Many of the disqualified mortgages are owned or backed by Fannie Mae and Freddie Mac, the government-controlled mortgage companies. The Obama administration could direct the companies to refinance the loans of anyone who is current. That could pave the way for up to eight million refinancings, for a savings to borrowers of roughly $24 billion a year.

Essentially, the NYT wants to add an unnatural amount of risk to the market (again) to counter the natural correction of home prices instead of allowing home equity to return to market levels over time. As the Times itself points out, this is part of the cause of the original housing bubble:

Loosening loan standards may seem like a replay of what caused the mortgage mess, including the costly failure of Fannie and Freddie. But both companies and taxpayers are on the hook if borrowers default.

Taxpayers are only on the hook if the government does precisely what it has already done: subsidize risky lending thus ballooning the default rate and promising to pay for the negative effects of their folly with taxpayer money.

Filed under: Economics, Politics,

Basic economics: 9/11 edition

On the 9th anniversary of the September 11th attacks, Bob Crandall, the former president and CEO of American Airlines, appeared on FOX News with Neil Cavuto to discuss airline safety since 9/11 as well as the little known “airline bailout.”

Understandably overshadowed by the worst terrorist attack in our nation’s history (and because Republicans only criticize bailouts and massive spending when done by Democrats) the airline bailout got little attention at the time it was passed. Now, with the distress of 9/11 mitigated by father time, it serves as a great exemplifier of the very core laws of economics – supply and demand – in an ‘era of bailouts.’

In his interview with Neil Cavuto, Crandall claims that the airline industry “might very well have simply run out of cash” sans the government bailout. He goes on to say that without taxpayer cash the industry would not be able to operate, that planes would not be able to fly although, only seconds prior, Cavuto had pointed out one very simple yet paramount fact – “people were very afraid to fly.

This is where it gets very simple: If fewer people want to fly, fewer planes are required to fly them. Fewer flight attendants are then needed to serve passengers, and fewer employees to operate the terminals. The industry will adjust and, if done properly, losses can be attenuated.

These are all economic axioms. Surely Mr. Crandall, a graduate of the University of Pennsylvania’s Wharton School, knows how the profit-and-loss mechanisms of a free market works. What he also knows is that the airline industry was heavily troubled prior to September 11th.

In the early 90’s the entire industry suffered a near $10 billion loss. Many airlines were filing for bankruptcy or collapsing altogether. After Crandall’s departure, American bought Trans World Airlines, which filed for its third bankruptcy as part of the purchasing agreement, in April 2001. Four months later that year, still prior to 9/11, Midway Airlines filed Chapter 11 bankruptcy due largely to competition (imagine that!) from low-cost Southwest Airlines opening shop at Raleigh-Durham. After Christmas came early for the industry via government bailout, Midway resumed operations until filing bankruptcy once more in 2003 and finally ceasing operations for good.

What the airline bailout teaches us is that Keynsianism fails every time it is tried. Markets will adjust to fluctuations in the economy just as the airline industry was in the process of doing before the natural flow of the business cycle was interrupted by government intervention.

In other words, basic economics.

Filed under: Economics, Politics,

Haley Barbour and free labor

It is highly unfortunate that it took a natural disaster for a prominent member of the Republican Party to understand the benefits of free labor. Indeed, it was in the aftermath of Hurrican Katrina that Mississippi Governor Haley Barbour came to appreciate the influx of labor, both legal and illegal, to help the ailing state. With hundreds dead and billions of dollars in damage, Mississippi was on its knees. In an interview with Peter Robinson from the Hoover Institution, Governor Barbour attributed much of the success of the recovery effort to immigrant workers.

I don’t know where we would have been in Mississippi after Katrina if it hadn’t been for the Spanish speakers that came in to help rebuild, and there’s no doubt in my mind some of them weren’t here legally. Some of them were, some of them weren’t. But they came in, they looked for the work. If they hadn’t been there, if they hadn’t come and stayed for a few months or a couple of years, we would be way, way, way behind where we are now.

The entire Katrina recovery effort owes much of its success to President Bush, who suspended the Davis-Bacon Act in response to the damage caused by Hurricane Katrina stating that it would “result in greater assistance to these devastated communities and will permit the employment of thousands of additional individuals.” The act, implemented in 1931 to intentionally stifle competition in the labor market and keep blacks out of work, was also suspended by George H. W. Bush in 1992 in response to Hurricane Andrew.

It strikes me as odd that Republicans support a free labor market in times of disaster but otherwise turn immediately into protectionists with an asinine immigration policy.  There are a few, however, who get it, such as Arizona Representative Jeff Flake.

Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!

Filed under: Economics, Politics, ,