the consumer nation

Often a lot is made over the large, sometimes described as excessive, consumption of the American public.  Officials from both parties decry that the U.S. cannot continue to consume at the rate it does, importing products from all over the world, and only exporting a few select products to the international community.  According to these officials this consumption is unsustainable and will eventually cost America its status as the economic leader of the free world.  But what causes these officials to make these accusations?  And are they right in their hypotheses?

The answer to the first question is almost always the same, regardless of the product or industry.   When American consumers buy cheap international products, the artificially low wages of foreign workers and subsidies of foreign governments make competition between the international producers and domestic producers fundamentally unfair.  American producers, with higher labor costs and large costs associated with complying with both state and federal industrial standards, cannot produce the products as cheaply as 3rd world labor.  In order to insulate American industries, the federal government should impose high tariffs on imports from these countries, thereby protecting the domestic industry.  Therefore the American industry will be able to compete with the international competitors, and the American workers will not lose their jobs because of cheap labor overseas.  

Now this all this sounds great, and its easy to make soundbites that can convince people that this is the right policy.  However, in reality this practice does more to harm the American people than it does to protect them.  First, we must understand that if another country can produce a good cheaper than we can domestically, it is the best interest of the large percentage of the American people to buy at this lower price.  As I stated above, the U.S. is a nation of consumers, and by allowing the consumer to purchase a product at the lowest possible cost, the maximum amount of people will see a benefit.  

Additionally, if Americans choose to buy strictly foreign products at the expense of purchasing domestic products, there is a market mechanism to counteract this balance.  The reason international labor is cheaper is because foreign workers are willing to accept less for the same work that American workers in the same industry will accept for the job.  Now these international workers are not paid in U.S. dollars, but in their home country's currency.  However, American consumers purchase their products using U.S. dollars.  In order to pay their workers, international producers must change the U.S. dollars paid into their own country's currency.  When Americans are buying large amounts of international products and few international consumers are buying American products, instead buying from their own domestic industry or another nation other than the U.S., the result is that more people will attempt to change dollars into the international currency than the international currency into dollars.  As a result the exchange rate between the international currency and the dollar will change, with the dollar becoming relative less valuable than it was in relation to the international currency.  In turn, this means that the international labors will become more expensive in terms of the amount of U.S. dollars it takes to pay for their labor.  Additionally, U.S. exports will drop in price in the international market, making U.S. exports more competitive abroad.  In the long term, if the market is allowed to function properly, an equilibrium will be struck, and the U.S. consumer will be able to buy the cheapest products, and products that the U.S. can produce most cheaply will be purchased both domestically and abroad.  

Now many are quick to point out that this equilibrium point may occur at a price where many industries that are currently being subsidized would no longer be able to operate profitably (easy example is the domestic auto industry) and thousands of people would lose their jobs.  Well this is probably true, but in the grand scheme of things it will maximize the country's benefit to let these industries fail.  The benefits to the consumer of lower prices for goods far outweigh the benefits to workers of a government subsidized industry.  In most any industry, the amount of workers is small relative to the amount of consumers of the product.  Even if some workers lose their jobs, a much larger number of people will see the benefit of lower prices.  And the people that do lose their jobs can either get a new job in a similar industry that has a business model that can compete with the international  producers, or they can get jobs in a different industry where American producers can create the cheapest products.  

Opponents of free trade like to portray economic problems as a winner/loser dichotomy.  According to their arguments, when U.S. consumers buy international products at the expense of domestic producers, the foreign country wins and the U.S. loses.  But in reality economic transactions are win/win situations.  The transaction would not take place if both producer and consumer saw a benefit.  In this case, the international producer benefits from sales of its product, and the American consumer benefits by receiving a product that he desires at the lowest price he can find.  If the U.S. is importing more value than it is exporting, than exchange rates will change until the equilibrium is reached.  If the U.S. is truly a nation of consumers, which it surely is, than it is the free market, and not the tyranny of government controls that will provide the maximum benefit to the American people. 

play him off, keyboard cat

$3.5 trillion and manny being manny

To most people $3.5 trillion is an un-immanginable amount of money.  Hell, to 99% of Americans, $3.5 million is more money than they will ever see.  That is what makes Obama's proposed FY2010 budget so ridiculous.  At at total bill of about $3.5 trillion, it will most likely be well over 25% of the U.S.'s GDP.  In other words, for every dollar created through private enterprise and entreprenuership the federal government will be shelling out a quarter (maybe even a quarter and an extra nickle and few pennies depending on how quickly the economy recovers).  This may not seem like a huge event, as over the past few decade Americans have become all too used to government spending trillions of dollars they don't have.  But unlike past extravagances for the first time in our history a full 50% of the federal budget or roughly $1.75 trillion will be financed through defecit spending and borrowing.  Even Mr. Obama admits that under the current plan the federal debt will be doubled within 10 years.  

What I just can't seem to understand is the lack of outrage over such a proposal.  Now I can understand why old farts like the members of the AARP are so enamoured by Obama; they will be long dead before we ever have to pay off any of our debt.  However, young people, most of whom are Obama's biggest supporters, don't seem to care at all that the debt that the government is currently building up will eventually have to be paid for.  Whether it is in the form of higher taxes or inflated money, the next generations will be poorer because of excesses of toady.  And I'm not even complaining about what the money is being spent on, just the fact that the federal government is so irresponsible that it will jeopordize the futures of millions of Americans so that it can pay for its political expenses and pet projects of the present. 

On an unrelated note Manny Ramirez was suppsended 50 games for violating the MLB's performance enhancing drug policy.  HAHA.  Let's see the Dodgers win all their home games without a cheating Manny.  I can't say I saw this coming, but it is a present suprise.  I bet if they did a hair follicle tesy on Manny it would come back positive for every drug known to man, considering his hairs have to date back to win he was 10 years old.  I'm all for a Manny suspension.  Anything that makes it easier for the WORLD CHAMPION PHILADELPHIA PHILLIES easier to repeat as world champions is fine with me.

jack kemp, becker and posner, and the federal reserve

First, I would like to start off with the sad news the former NFL quarterback, Congressman, and 1996 Vice-Presidential candidate Jack Kemp died over the weekend. Kemp was one of the few voices for truly free markets and limited government over the past half century. One of the biggest mistakes the Republican party has ever made was nominating George H. W. Bush for President in 1988 instead of Kemp.  The first Bush's anti-free trade and pro-tax growth policies undercut the Republican message and its legitimacy, leading directly to Bill Clinton's election in 1992.  Kemp also co-sponsored Reagan's 30% across the board tax cuts in the early 1980's, which were a major factor contributing the sustained economic growth of the United States during the 1980's and 1990's.  Today's WSJ had an excellent collection of partial op-eds written by Kemp over the past 30 years.  The link is here, and I highly recommend checking it out, as Kemp's consistent policies and dedication to free markets, show that he understood the problems facing the nation and how to address it.  If more of Kemp's ideas had been put into place, we may not be facing as serious economic problems as we are today.

Secondly, I recently stumbled upon a blog written by Gary Becker (a Nobel Prize winning economist at the University of Chicago) and Richard Posner (Judge on the 7th Circuit Court of Appeals, leading scholar on economics and the law, and probably the most cited Circuit Judge in United States history).  Located at http://www.becker-posner-blog.com/, the blog breaks down important issues in economic terms.  For instance, in their latest posts, the two independently analyze the economic consequences of a pandemic such as swine flu, the costs associated with preventing such an outbreak, and posit several viable options as the most economically efficient way to tackle such a problem.  I highly recommend it to anyone interested in economics and its application to real world political issues as well as policy in general.   Both Becker and Posner have great economic and analytical minds and are able to succinctly breakdown very complex issues, thereby making them understandable even to someone with only a modest economic background.  

In one of his more recent posts, Judge Posner addressed the Independence and fundamental role of the Federal Reserve system, which got me thinking.  It is unfortunate and extremely disheartening that so many Americans do not even understand what it is that the Fed actually does or what its role is in the American financial system.  Fundamentally, many Americans understand that the Fed adjusts interests rates, but they do not understand how they accomplish this goal, what the Fed's objectives actually are, and how it is responsible for the entire monetary policy of the United States.  Therefore I am going to briefly describe the Fed and its role in our financial system and address what I consider potentially devestating powers available to the Fed with regards to monetary policy.

The federal reserve was originally created in 1913 as a lender of last resort in order to prevent runs on banks that were common at that time.  After the Bretten Woods agreement collapsed in the 1970's when Nixon took the U.S. off the gold standard, the Fed gained increased influence by affecting monetary policy in order to attempt to maintain low inflation as well as maximum employment.  But how does the fed actually affect monetary policy?  In times of economic downturn, the money supply will become more scarce, as more people will save in an expectation that they will need it later during more tough times.  In order to keep the credit markets flowing and provide the capital necessary to spur investment, the fed will buy government securities/bonds (mostly short-term bonds), which pumps cash into the economy when the cash is deposited in bank accounts and then withdrawn and spent.  This increase in monetary supply held by banks will allow for more money to be lent, decreasing the demanded interest for such loans (i.e. lowering short term interest rates).  Long term interest rates will inevitably follow (at least to some degree) the short term rates, which will increasing lending, hopefully spurring economic growth and growing the economy.  Conversely, if the Fed wants to raise interest rates (probably to combat inflation) it will sell some of the government bonds it holds, thereby removing money from the financial system.  Presumably, it could then prevent that money from re-entering the system, which decreases the total amount available, thereby increasing the demand for the currency.  This increased demand will lead lenders to value their money higher, an charge an increased rate of interest on the money that they loan.

All of this sounds good, but missteps by the Fed over the past few decades have had extremely detrimental effects on the U.S. economy.  Additionally, the Fed's tremendous power as the sole decision maker with regards to the U.S. money supply (and effectively the entire world's money supply as many major currencies are fixed to the U.S. dollar) has the potential to have a devastating effect on the country's growth and the standard of living of all Americans.  Today, there is almost uniform agreement that the Fed's easy money policy of the late 1990's and early 2000's was a major contributing factor to the housing bubble that lead to the economic collapse we are currently facing.  In order to spur current economic growth, the Fed has increased the money supply by over $1 trillion this year alone.  If the Fed gets its job right, then it should increase the money supply as total U.S. output increase, thereby stabilizing prices relative to growth.  However, this rarely happens.  In order to prevent devastating deflation from occurring, the Fed must over estimate the amount of money to produce, thus increasing money supply relative to total economic output and causing inflation.  In fact, for the past three decades the fed has doubled the money supply every ten years.  This inflation is a hidden tax, which is in fact extremely regressive.  How is it that we allow a completely private, unelected board decide how much to tax the American consumer in the form of inflation?  It just doesn't make sense.  Unfortunately I do not have time to outline my solution here, but I will in a future post.

the choice is now

I've been thinking about this for a while now.  For over two hundred years the United States has been a beacon of light in a sometimes dark world.  The reason for this is the hope and freedom America has stood for.  During his campaign President Obama campaigned on a similar message of hope.  But what has been America's "theme" been since its inception?  I think it's been the American Dream: the freedom to pursue your own interests and better your place in society through hard work and free enterprise.  This simple, but remarkably inspiring idea of a society of truly free men, has inspired millions of Americans and immigrants alike over the past two centuries.  While much of the rest of the world has been under the darkness of tyranny, oppression and totalitarian regimes, America has stood up for the ideals of life, liberty and the pursuit of happiness.

Unfortunately, many of these values seem to be eroding away in today's America.  I was inspired to write this post after reading a WSJ commentary entitled "The Real Culture War is Over Capitalism," (thanks for the recommendation Dad) but I think the current cultural class in America goes beyond capitalism, it is over individual liberty and personal autonomy in general.  Yesterday, the preliminary plans for a restructured GM and Chrysler were released to the public.  In each case the government will have large shares of the companies.  In the case of GM, the federal government will receive a 50% stake in the newly restructured company in exchange for $16.2 billion in treasury loans and $8.1 billion in GM debt.  By some estimates,  this could amount to a return-on-investment of up to $0.87 on the dollar.  Current private bondholders of GM stock, who currently own about $27.2 billion in unsecured GM credit, would receive only a 10% stake in exchange for a debt-for-equity swap.  This amounts to a return of less than five cents on the dollar.  How is this fair?  In a traditional bankruptcy both would be considered unsecured creditors, and would be treated relatively equally.  Instead the Government and their chosen "winners" (in this case the UAW who received a 39% stake after concessions in their collective bargaining agreements) make out like bandits while private investors and lenders receive the short end of the stick.  

However, the auto industry is only part of a much larger and more troubling trend.  America is moving away from the idea that hard work and doing the right thing should be rewarded.  Instead we are becoming a country where we think everyone, regardless of how well you planned for the future or took into consideration long term consequences, should prosper.  We want a Utopian society where even bad investments and ideas are rewarded.  That is not the American ideal, and in fact it is an unsustainable model.  Not every investment can succeed, and we can't prop up every failing industry.

There are millions of Americans out there who are doing the right thing.  They are homeowners who saved so that they could put a large enough down payment on their homes so that they could afford their mortgages.  They are small business owners who have made concessions so that they can navigate through the hard times.  They are all the other people who made the right, but unpopular choice.  You cannot have personal freedom without personal responsibility, and by eliminating the responsibilities associated with economic decisions, the federal government is eroding liberty from its citizens.  It may not seem like much now, and to many it may seem like the humane thing to do, but in a society of ordered liberty, any encroachment on these freedoms will cause our society to begin moving down a slippery slope.  If these concessions to our freedoms are ok now, what will be ok in 20 years? 50 years? 100 years?  If our history teaches us anything, once the federal government takes the power to control something, it never gives it back.  If we don't stand up now, then with each day and each concession we make, we move further and further from the ideals of the founding fathers and closer to the centralized planning government so feared in the classic novels 1984 and Brave New World.  

This may sound like a joke to some, but I take my freedom very seriously.  We are fortunate enough to live in the most free and fair society in the history of mankind.  I just want to keep it that way.

specter and everything else that is wrong with the gop

As I'm sure most of you have heard, my Senator from the state of Pennsylvania, Arlen Specter, has decided to defect from the Republican Party.  Specter has stated that the reason for leaving was because the Republican Party has moved too far right while he has remained true to his moderate record.  That's some of the biggest bullshit I've heard in a long time.  First, Specter's move is a purely political one.  He's a lifetime politician, the scourge of the country.  He realized that Pat Toomey, who unsuccessfully ran for Specter's seat in the 2004 Republican primary, was leading him by 21 points in polls among likely Republican voters in 2010, and that he wasn't going to be renominated as the Republican candidate for Senate in the next election cycle.  He then made a deal with Democrats that he would caucus with them as long as they didn't put up a Democratic challenger in 2010.  Some ideological struggle indeed.  

Although this looks like a major defeat for the GOP, and it is in many respects, I think this could be a turning point for the party if they use this defection to begin moving in a better direction.  Many pundits are claiming that this is a huge loss because Democrats will now have a filibuster proof majority in the Senate.  In reality, Specter was already going to vote with the Democrats on many issues, so his switching party affiliations really didn't get them any more votes.  The real test of whether the Democrats can prevent a filibuster will come from moderate Democrats in traditionally Republican states like Kent Conrad of North Dakota, Evan Bayh of Indiana, and Ben Nelson of Nebraska.  Their votes on issues like cap-and-trade will determine whether it will become law because Specter was already going to vote with the Democrats.

Specter claimed that the Republican party has been moving too far right for his tastes.  Doubtful.  Republicans have abandoned the principles upon which the Reagan revolution was founded: belief in restraining government spending, pro-growth policies, tax reduction, sound national defense, and maximum individual liberty. First, when it comes to personal freedom as well as personal responsibility issues,  Republicans have betrayed their roots of classical liberal ideology.  In our current political environment, the question always seems to be, "How can the federal government fix the problem?"  If this is the question that is being debated in Washington, then Republicans are always going to lose.  Democrats are the party of government run solutions, and instead of offering a watered-down democratic solution, the Republican party needs to articulate free market and private solutions to the issues facing us as a nation.  

More than anyone, former President Bush is the most to blame for this destruction in fundamental ideology.  Far too often he caved to political pressures and rather than attempting to fundamentally reform government expenditures.  He expanded the size of government through programs like Medicare Reform, No Child Left Behind, and other federal economic regulation.  During Bush's term in office, the  Federal Registry, which contains the rules and laws for federal regulation of all types of industries, grew from 64,438 new pages in 2001 to 78,090 in new pages in 2007, a record amount of regulation. Economically significant regulations, defined as regulations which cost more than $100 million a year, increased by 70%.  Spending on regulation increased by 62% from $26.4 billion to $42.7 billion.  Now that's what I call a limited government voting record.

Not to mention a relatively new wing of the Republican party, the Christian Conservative, has come to dominate the GOP agenda.  Southern Republicans, who gain most of their political support from deeply religious conservatives, has caused the party to move away from a belief in limited government and personal freedom.  Instead of supporting individual rights, the GOP has demonized ethnic, racial and political minorities, believing that supporting the Christian conservative agenda is more important than protecting individual rights.  This has caused groups like gays, hispanics, african americans and jews to feel alienated from the party, preventing the GOP from winning even small minority support.  Until the GOP fundamentally restructures their view of how the government should be run, and what the appropriate role of the government should be, they will continue to lose support nationwide.

So what should the GOP do?  I am glad you asked.  Below are 5 points I believe would fundamentally overhaul the party and could make them into a majority party once again.  Not to  mention it will begin moving America back in the direction of freedom and prosperity.

1. Explain why government is not the solution.
   Government spending is wasteful.  Everyone knows it.  We can't let the the government pick economic winners and losers in America because it is only going to lead to entrenched bureaucracies with no objective other than attempting to force the government to continue giving them funding.  The deficits we are running are unsustainable, will lead to rampant inflation, and will destroy the financial system beyond repair.
   
   
2. Begin offering free market solutions to today's economic problems.
   Republicans are not articulating why Obama's policies are going to bankrupt America in the long term.  They need to stress that free market solutions are inherently more economically efficient than government spending programs, and that prosperity will be maximized, especially in the poorest classes, when government allows entrepreneurs to create new opportunities.  This sounds like a win-win, but they must also stress that free market solutions means allowing bad investments to fail.  In other words, no more bailouts for failing companies like the domestic auto industry.  Failures of these companies, although painful in the short term, create tremendous opportunities for new economic growth in the long term as new suppliers will emerge to meet the newly found surplus in demand created by the fall in supply.
   
   
3. Support individual rights and liberties.
   The federal government should have no role in deciding who should be allowed to get married, and Republicans need to recommit themselves to protecting individual liberties all all costs.  Rights belong to individuals, not groups, and that is the message they should stress.  By strengthening individual rights, they can meet two important goals: preventing future government encroachment of personal freedoms (including economic freedoms), and opening up the party to traditionally democratic voters like gays, pro-choice moderate women, and other minority groups who believe strongly in personal rights.  
   
   
4. Stress the importance of the citizen politician.
   Now this might just be a pipe dream of mine, but I think it could be a winning issue for Republicans.  They should push for term limits in both houses of Congress.  My recommendation would be you can be re-elected into the house three times (four terms totaling eight years), and as many times as you wished in the Senate, but you cannot run for re-election in the term directly after you served.  By rededicating themselves to the idea of citizen politicians, a notion strongly supported by the founding fathers, we can eliminate lifetime politicians, thereby limiting the control of special interests.  If politicians are not constantly running for re-election, there is no incentive for them to constantly raise money, greatly reducing the influence of special interest groups.  Unfortunately this is not going to happen.  Too many Republicans themselves are career politicians to support such a matter. 
   
   
5. Explain that Americans are not getting what they are paying for.
   The U.S. budget this year is in the trillions of dollars.  Many Americans are paying between 30-60% of the income in taxes of some kind, be it federal income tax, state income tax, local wage taxes, state sales taxes, etc.  In some cases, that is the equivalent of working Monday through Friday and only getting paid for working Monday and Tuesday.  And for what?  With the massive government spending, Very few people see any concrete benefits that come anywhere near the tremendous amount they put into the system.  These high tax rates destroy the incentive to work hard, not to mention they are fundamentally unfair.  Republicans should emphasize that when a government grows to the size ours has currently achieved, it is unable to effectively govern in an efficient way.  We essentially work half the time to support ourselves, and half the time to support the government.

Now I don't kid myself into thinking this is the path the GOP will follow.  Unfortunately I think they are in too deep at this point, and it is going to take a major economic collapse (and if you think the current recession is bad just wait until will have major negative economic growth coupled with skyrocketing inflation from unfunded debt - 2008-09 will look like rosy economic times) to overhaul the system.  Hopefully I'm wrong.  We are going down a path that will bankrupt the country.  Additionally we are taking away both economic and personal freedoms in the name of protecting the common good.  One of my favorite quotes is from Supreme Court Justice Louis Brandeis who in his dissenting opinion in Olmstead v. United States stated, "Experience should teach us to be most on our guard to protect liberty when the Government's purposes are beneficent. Men born to freedom are naturally alert to repel invasion of their liberty by evil-minded rulers. The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding."

swine flu

The swine flu (or as they call it in Israel, Mexican flu [pigs aren't kosher]) is starting to devastate the world.  Now I am still a firm believer that supervolcanos are the number one threat to human civilization, but pandemics aren't far off.  The 1918 Spanish flu killed approximately 40 million people, or about 2.5% of the planet's human population.  Currently, the swine flu kills about 7% of the people it has infected, so it has the potential to be devestating.  Now there is a lot of speculation over what caused the outbreak.  This report out of France claims that the virus is a mix between avian, pig, and man versions of the flu virus.  This has led some people, led by former Vice-President Al Gore, to blame the outbreak on what they consider then number one threat to the US: man-bear-pig (apparently Gore claims that man-bear-pig diliberatly mutated the virus from bear to bird form to throw authorities off track).  

As much as I would like to believe Gore that man-bear-pig is the culprit, I have discovered the actual source of the virus.  It turns out that it is from hicks who live in the country.  Check out the photo below.  Its all the evidence you need (click photo for larger image).