Liberalism Fails Society and This Most in Need


Since the early 1960s liberals have promoted the narrative that people on the Left are more compassionate than those on the Right. This proposition was based on a motion, not empirical evidence. It emotionally seems right that the government should give to those in need. Conversely, those who would withhold government’s largess from the less fortunate lack compassion.

While a governmental safety net has been a part of American society since Franklin Delano Roosevelt’s Administration, it advanced significantly under President Lyndon Johnson. Given we are now a half-century into Johnson’s Great Society, it is reasonable to determine efficacy of the programs.

The Wall Street Journal’s Jason Riley recently published some important statistics since the initiation of the Great Society:

  • In 1962 the percentage of the Americans receiving government assistance in the form of cash transfers was about 12%. Today this has nearly doubled to 21%.
  • In 2012 over 48% of Americans resided in households receiving some form of government benefits. This number was only 30% in 1983.
  • By 2011 the US published property rate remained flat compared to 1965. During the same period, US governmental expenditures on poverty rose by 900% per receiving person (after inflation adjustments).
  • The Heritage Foundation marks 2014 as the 50th anniversary of Johnson’s Great Society. They calculated that federal government spending increased by 16 times, adjusted for inflation, for means tested welfare during this period.

Cause and effect are often difficult to prove. However, in the case of the Great Society Programs and their offspring, the evidence seems convincing that at the very least, much of the spending was wasteful and have not benefited those most in need over the long-term. At the same time, these programs significantly benefited certain industries that serve the programs and distributed their benefits. Those industries offer significant resistance to fundamentally changing governmental spending habits.

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Socialism has Ruined Venezuela

Since at least the 1960s, Socialism and its younger sibling, Communism, have been the darlings of Leftists elitists, especially those on college campuses. When these Progressives see perceived inequities in capitalist countries, they often look to utopian solutions with Socialism being a primary fallback. The amount of time that this neo-religion has been promoted is remarkable given the failure of Socialism to create prosperity for countries and their citizens.

With the recent passing of Fidel Castro, Leftists have created eulogies that include the false narrative that Castro was a champion of his people. How ludicrous! The Cuban people continue driving cars built in the 1950s. In addition, the travels of the boat people have been in one direction only; out of Cuba and to the United States. There is no better barometer than when people vote with their feet.

Cuba is not the only country in the Western Hemisphere ruined by Socialist economic policies. Venezuela is a poster child for the disastrous economic and human consequences of centrally controlled economies. Jeff Jacoby of The Boston Globe recently published an article highlighting the current tragedy in Venezuela. As he points out, Venezuela had long been an economic success in South America, even before becoming an energy powerhouse. Then, in 1998 Hugo Chavez came to power with not only an anti-America bent, but a disdain for capitalism. Continue reading

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Obamacare May Implode

The news media and Americans are focused on the upcoming presidential election.  Given the important role the president plays in the United States this is natural.  However, the focus on the election has been on the questionable personal traits of Donald Trump and Hillary Clinton.  This myopic focus masks serious issues that face the Country and the next president, irrespective of who is elected.

The significant challenges the Country faces include international relations, as well as economic issues.  The Middle East is devolving into chaos that will eliminate the artificial borders and countries created after World War I.  Russia is again adversarial and imperialistic.  Economic growth in the United States is tepid with the total debt soon to exceed $20 trillion.  Irrespective of whether Clinton or Trump become president, these issues will prove intractable.

Within the broader subject of economic challenges is the out of control medical costs.  This problem had its roots long before Barack Obama became president.  However, the President’s signature program, Obamacare, exasperated the problems and is showing signs of heading into a death spiral.

The President is aware of Obamacare failings writing in The Journal of the American Medical Association: “Too many Americans still strain to pay for their physician visits and prescriptions, cover their deductibles or pay their monthly insurance bills; struggle to navigate a complex, sometimes bewildering system; and remain uninsured.”  This is a far cry from the President’s promises to the American people that healthcare costs would decrease.  Obamacare not only added expensive mandates to the cost of medical insurance, but covered some 20 million people who previously did not have insurance.  For the President to have made this cost cutting promise indicates incompetence or dishonesty, there is no third option. Continue reading

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Incestuous Relationship Between Banks and Government

The greatest economic calamity of contemporary time occurred in 2008.  While there were complex issues behind the economic meltdown, main culprit was an overvalued housing market that became a bubble.  When housing valuations began to fall, the bubble popped, the catalyst for the overall economic meltdown.

The housing bubble did not occur by chance or natural economic activity.  The fuel that fed this fire included:

  • Irresponsible Federal Reserve monetary policy that left interest rates too low for too long. This not only helped promote cheaper mortgages, but also cajoled investors into investing in mortgage-backed securities, seeking yield in very products.
  • Inappropriate lending practices were forced on commercial banks by the government in its pursuit of a social agenda, which included the Community Reinvestment Act of 1977. Through Fannie Mae and Freddie Mac, the government forced banks to lower lending standards so that individuals who could not afford mortgages received them.
  • The government also has an in incestuous relationship with banks. For example, it created legislation enabling commercial banks to become involved with very risky financial products that risked systemic damage to the economy; i.e. repeal of the Glass-Steagall Act late in the Clinton administration,  In addition, the Commodity Futures Modernization Act of 2000 allowed banks to become involved in the ultra-high-risk derivatives market.

Most economists agree that actions of the Fed, government legislation and banker greed were responsible for creating the housing bubble and subsequent banking crisis.  Significant lip-service was offered by politicians for corrective action, including the massive Dodd-Frank legislation of 2010.  However, this legislation is causing more problems in the banking system.  The crisis was caused by banks supposedly being too big to fail.  With Dodd-Frank, the largest banks have gotten bigger. Continue reading

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After Brexit Vote, Markets Reach New Highs

The weeks leading up to Britain’s vote on whether to remain in European Union included cataclysmic claims by economic “experts” as to what would happen to the world economy should Britain choose to leave the EU.  In the few days after the vote to leave, the US equity markets and others dropped.  However, within days the US market came roaring back and has since hit record highs.

Did the economic experts get it wrong?  Did they purposely mislead?  The answer is possibly both.  Equities’ valuations are now more influenced by central bank action then market fundamentals.  This type of perverse relationship governing economic activity is a classic warning sign of bubble creation, which ultimately always end badly.

David Stockman is a well-respected economist from the Reagan administration who then infamously questioned Reagan’s policies.  He is written an article titled “This “Market” Discounts Nothing Except Monetary Cocaine, which is a worthy read.  His comments include:

  • “The outlook for economic growth or corporate profits haven’t improved since the market’s post-Brexit low. The market’s new highs are just another party in the casino after the latest batch of monetary cocaine — helicopter money — was passed all around.”
  • “That has been exactly the pattern of multiple rounds of QE and the unending invention of excuses to prolong ZIRP into its 90th month. The resulting rises in the stock averages, of course, were the result of fresh liquidity injections and the associated monetary high, not the discounting of new information about economics and profits.”
  • “The reality of rapidly swelling deficits even before enactment of a massive helicopter money fiscal stimulus program will scare the wits out of conservative politicians, and much of the electorate, too. And the prospect that the resulting huge issuance of Treasury bonds will be purchased directly by the Fed will only compound the fright.”
  • “In short, the market is not trading on a rebound in GDP, revenue growth or a breakout of already elevated profit margins. It’s just high on one more dose of monetary cocaine that in short order will prove to have been not even that.”

It is impossible to determine how much longer it will continue, or how high the equities bubble will go.  But like all other bull markets, this one too will end irrespective of central bank interventions.  If their actions to date have indeed created a bold, the downside will be significant, quick and come as a surprise to central bankers.

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UK Says “Yes” to Brexit

Flag United KingdomYesterday the United Kingdom held its referendum as to whether it would stay or exit the European Union.  The vote is in and the British decided to leave the EU.

Today, markets throughout the world have experienced turmoil, seemingly surprised by Brits’ decision.  This reaction is curious given that the various indicators, except the polls, pointed towards a British exit.

The British electorate’s decision to leave the EU is part of a broader worldwide phenomenon.  Governments and bureaucracies in many countries have been growing at increasing rates over the decades.  This has enriched and given additional power to ruling elites.  The masses accepted this until recent years when their standard of living stagnated.  Two changes affected the mentality of the masses:

  • A growing number of middle class in Western Europe and the United States have seen decreasing living standards.
  • Bureaucracies, unelected shadow governments, have exerted more influence through regulations.

Born of dissatisfaction, is a new type of revolution enhanced by social media and the Internet is occurring.  In the United States the phenomena is epitomized by the popularity of Donald Trump and Bernie Sanders.  Their popularity is resounding “no” vote for the status quo, irrespective of the potential consequences of electing untested populists.

Similarly, Britain’s decision to leave the EU is a resounding vote against the status quo.  The British people no longer will allow unelected bureaucrats in Brussels to create laws and regulations for the UK.  They also indicated their desire for stronger border controls.

The European Union was a mismanaged creation of the political class.  The goal was to create a United States of Europe increase economic activity and lessen the likelihood of armed conflicts, as so often happened in Europe.  Unlike the United States with a powerful central bank, European countries still control much of their monetary policies, irrespective of the single currency.  Also unlike the United States where the central government is elected by the people, Europeans have no vote concerning the bureaucracy in Brussels that creates laws and regulations that member states must abide by.  The British say “no more”, irrespective of the consequences of leaving the EU.

Since World War II the world has traveled through two different periods.

  • The Cold War between the United States and the Soviet Union for all practical purposes divided the world into two spheres. This period effectively ended in 1991.
  • Since the end of the Cold War, the political class worked to create a new world order where sovereign borders would be made moot. The beginning of the end of this period started in 2008 with the great financial meltdown.  This meltdown exposed the weakness of this new order that in part was built on flawed policies and excessive debt.

We are in the early stages of the next phase that involves rejection of the political elites’ vision for the world since 1991.  It is likely that the UK’s Brexit vote will be viewed historically as the start of this next phase.  It is difficult to visualize what this new reality actually means, other than significant change.  Progressives overreached in a power grab for themselves and their bureaucracies.  History has shown that this type of action generally leads to overreaction from the other side.

This Blog has repeatedly written of the illogic of the European Union from an economic standpoint.  One posting in October 2013 titled Noble Peace Prize Awarded to European Union reviewed rather incredulously of the European Union being the Nobel Peace Prize.  The turn of events since helps show just how far out of touch the political elites are, including those that award the Nobel Peace Prize.

 

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April’s Employment Numbers Miserable, Yet Unemployment Rate Drops

The April jobs report has been released by the US Department of Labor and it is not pretty.  According to CCNMoney, a mere 38,000 jobs were created in the US, the lowest monthly rate in six years. To put this into perspective, in the past two years the monthly increased averaged about 200,000 new jobs and the number required just to keep up with new entrants into the job market is in excess of 200,000 monthly.

Commenting on the job’s number, Curt Long, chief economist at the National Association of Federal Credit Unions, correctly said, “It’s a pretty gloomy report, hard to find a silver lining in this one“.  Contrast this realistic assessment with the Department of Labor’s unemployment number released indicating that the unemployment rate dropped to 4.7%, the lowest level in 9 years.  How does the Labor Department come up with such rubbish?  They merely stop counting those Americans who have given up the job search for lack of success.  Now that’s banjo accounting!

There are many reasons behind the US economy’s poor performance with government being a major factor.  Included in this list is the government’s willingness to create false reports to further its own political and bureaucratic agendas that often in conflict with those of the American people.

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Understanding the Trump/Sanders Phenomena

trumpsandersLet us travel back in time only 12 months.  America was starting to focus on the next potential President.  There was seeming certainty over the choices.  For Republicans, Jeb Bush was anointed the chosen one with a campaign war-chest that was unrivaled.  Similarly for Democrats, Hillary Clinton was to be anointed, being the next person up.  What was certain twelve months ago has since evaporated, ushering in a paradigm shift in American politics.

There is much in common between Donald Trump and Hillary Clinton and their supporters.  Historically, Donald Trump’s politics have had more in common with Democrat platforms.  Until recently Trump not only donated to Democratic candidates, but also hobnobbed with many of its elites including the Clintons.  Like Trump, Hillary has led a protected life, enjoying the benefits of the top 1% and with access to and being a powerbroker in Washington.

It is ironic that given the many similarities between Hillary and Donald, that Hillary is considered an insider and Donald the insurgent.  Both in fact are consummate insiders.

Trumps ascendancy to being the presumptive Republican nominee is remarkable.  He defeated 16 Republicans in the primaries, some who had been quite formable candidates.  Trump has since broken the spirit of the Republican establishment, who were powerless against his insurgent appeal.

Bernie Sanders, who has near zero chance of becoming the Democratic Party’s nominee, has encountered remarkable success against the Party’s anointed one, Hillary Clinton.  Hillary has the backing of nearly every Party leader, has had a significant funding advantage, yet has had difficulty competing against the 73 year old socialist.  With a bit of luck and a more sophisticated campaign early on, Sanders could have won the Party’s nomination.

Ignoring policies proposed by Sanders and Trump, there are similarities behind their successes.  Both are seen as outsiders to voters who are disenchanted in the direction the Country has taken, even though their support comes from opposite ends of the political spectrum.  Understanding the reasons behind this disenchantment by is more important than who wins in November.

Economist John Mauldin recently published a piece titled “Life on the Edge” that goes a long way towards explaining American’s radically switched politics.  While Mauldin shows compassion and understanding of the plight many less fortunate Americans, his economic background helps explain the difficulty in problem resolution.  Mauldin’s comments/conclusions include:

  • He castigates both political parties for giving us the choice of, as Peggy Noonan states, “Crazy Man vs. Criminal ”, concluding that: “People have real problems, and increasingly they don’t trust traditional leaders to solve them.”
  • Sanders is supported by left-leaning Americans who are “living on the edge, vulnerable and unprotected”.  Trump is being supported by another portion of Americans who believe they are being marginalized.
  • Mauldin divides Americans into the “protected” and “unprotected”.  He makes the important conclusion that the protected make public policy, but it is the unprotected who must live with the results.  The protected that create public policy are not subject to the penalties of these policies with Mauldin including “Because they are protected they feel they can do pretty much anything, impose any reality. They’re insulated from many of the effects of their own decisions.”  The unprotected are now saying enough is enough.
  • The protected Mauldin refers to are both Republicans and Democrats.  So too are the unprotected.  Party affiliation has become meaningless in this discussion.
  • A Federal Reserve survey found that nearly 50% of Americans could not cover an unexpected $400 expense.  No wonder voters are scared.  No wonder they have lost faith in politicians who not only promised so much, but whose policies helped create the economic problems the Country now faces.

There are many examples of policies created by the protected that inflict pain on the unprotected.  Progressives propose open borders for immigration.  These immigrants are mainly unskilled and compete for the lower skilled jobs in the United States.  This increased competition hurts poorer Americans.  It also benefits businesses that have access to cheaper labor.  In an effort to fix the damage done by the ill-conceived immigration policies, the protected then promote increasing the minimum wage.  This too hurts poorer Americans who lose their jobs to machines that are made still cheaper by the artificially low cost of capital.  A higher minimum wage also benefits larger corporations who are better equipped to pay higher wages than startups, their potential competitors.

Obamacare is another example of Progressive policies damaging the unprotected.  While many Americans now face doctor shortages and increasing healthcare premiums caused by Obamacare, the protected have access to concierge doctor services.  They also have access to accountants and lawyers who can take advantage of the ever-increasing regulatory and tax environments that average Americans do not have access to.

Finally, there is the rigged government numbers.  Unemployment is supposedly down to 5%.  However, this number does not take into account those Americans who have quit looking for jobs.  It also does not take into account less hours available for workers or the quality of jobs available.  Similarly, the government’s inflation numbers are rigged, removing from the calculation must-have goods and services whose costs have increased.  As a result, many Americans feel they are being left out of a supposedly improving economy.

We are eight years after the beginning of the Great Recession.  While various government stimulus programs and artificially low interest rates created bubbles that increased the wealth of the protected, it damaged the unprotected, increasing the wealth gap.  This led to the popularity of Sanders and Trump.  The fact that a Socialist and a bully have become so popular indicates how deep the frustrations are.  While this trend favors Donald Trump in the upcoming election, it blocks intellectual discussion concerning realistic policies that could actually improve the plight of middle Americans.

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Increasing Minimum Wage Killing Jobs

Discussions relating to raising the minimum wage inevitably include to the issue of “fairness”.  Those in favor of raising it point out that the minimum wage is not a “fair wage”.  Once this emotional claim is made, those who oppose increasing in the minimum wage are pegged as unenlightened and against allowing the lowest wage earners the opportunity to make a reasonable living.  Economic realities tell a different story.

Wendy’s is a large fast food chain with approximately 6,000 restaurants nationwide.  They have historically started employees at the minimum wage.  They recently announced steps to offset the cost increase due to the increased minimum wage and it is not good for workers.

According to Investors Business Daily, Wendy’s is replacing many of its order takers with an automatic kiosk system.  This action should surprise no one with a basic understanding of economics.  Not only does the new minimum wage increase the cost the labor, but with government inflicted artificially low interest rates, the cost of capital has decreased.  This decreases the cost of capital equipment at the same time the new minimum wage will increase the cost the labor.  Wendy’s response to the increased minimum wage will be duplicated by many in the service industry across the Country.

The political elitists who are behind the increased minimum wage will not be negatively impacted by the coming loss of lower paid jobs in America.  Their political positions could even improve with the additional votes they likely will receive from those who believe the increased minimum wage helps the working poor.  Further, with more Americans being unemployed these same political elitists can then offer handouts in exchange for future votes.  It’s a nice, but unholy, gig if you can get it.

There is another group of crony capitalists who will benefit from the increased minimum wage.   Large corporations who do not employee lower paid American workers will benefit by the increased wage pressures placed on upstart competitors who might try to make a better mousetrap.

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ECB Continues Cheap Money Policies

The Wall Street Journal reported that the European Central Bank (ECB) intends to continue with its loose monetary policies.  ECB President Mario Draghi held a news conference this week and stated that the Bank intends to continue to do whatever is necessary to fight deflation, including more interest rate cuts.  This followed the ECB’s decision last month to again cut interest rates and increase its bond purchases.

To put the ECB policies in context, the current ECB base interest rate is 0% with depositors actually paying 0.4% to keep money in banks.  This is a radical effort that continues central bank policies to stimulate the economy.  However, the policies have failed to promote growth.  In fact, there is a growing school of thought that the policies themselves have constrained growth due to the imbalances created.

The fact that central bank stimulative efforts have not worked have not curbed banker enthusiasm for more of the same.  For eight years artificially low interest rates have been the backbone of central bank policy.  After it becomes apparent that the policies did not work, bankers respond by calling for more of the same.  Wow, speaking of insanity!

At the news conference Draghi was questioned about even more radical future steps such as “helicopter money”.  With this approach, the nuclear option indeed, central banks basically hand out money to consumers to fight deflation, i.e. create inflation.  Draghi’s response was that the ECB has not officially discussed at the tactic.  Translation of central banker doubletalk: the approach is being considered. Continue reading

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