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“Our practical choice is not between a tax-cut deficit and budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve . . . a budget surplus.” John F. Kennedy

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Aug 21 2013

Detroit and Blue State America

Carolyn

As a country, we’ve seen the city of Detroit pushed into bankruptcy as a result of over half a century of municipal mismanagement and corruption, the largest municipal bankruptcy in US history, at $18-20 billion. At one time it stood as the richest city, per capita, in the US, as well as the fourth largest in terms of population.

What we’ve seen over the decades since Detroit’s economic and population height is a long, sustained flight of capital. Individuals and businesses have made the rational choice to invest in cities and towns where business growth is encouraged through contractual freedom (right-to-work), low taxation and decreased regulation. When the entrepreneurs and businesses that can easily leave, do, what remains is a static workforce made up of mostly union workers and government employees, or rather taxpayer-subsidized union employees.

From December 2010:

The Census Bureau announced today that eight states will gain at least one Congressional seat. Texas will gain four seats and Florida will gain two. Arizona, Georgia, Nevada, South Carolina, Utah and Washington will gain one seat each. The biggest losers will be New York and Ohio – both will lose two seats – while Illinois, Iowa, Louisiana, Massachusetts, Michigan, Missouri, New Jersey, and Pennsylvania will lose one seat each.

The average top personal income tax rate among gainers is 116 percent lower than among losers. The total state and local tax burden is nearly one-third lower, as is per capita government spending. In eight of ten losers, workers can be forced to join a union as a condition of employment. In 7 of the 8 gainers, workers are given a choice whether to join or contribute financially to a union.

Detroit’s bankruptcy was preceeded by sixty years of rising taxes, generous government pension promises and a shrinking tax base. Additionally, non-government unions forced much of the industry in Detroit into a position where it was advantageous to build plants oversees in order to avoid unsustainable costs.

Most of those who had the means to leave, did. Of those who have chosen to stay, fewer than half (49.8 percent) are either working or looking for work, the lowest rate among major US cities.

Detroit also has far more city employees per resident than do most other similar sized cities and, for those making $50,000 or more, the 4th largest tax burden among the largest US cities. In fact, those taxes are going to pay for things such as $56,000 for a horseshoer in the Detroit Water & Sewer Department, despite the fact that it has been years since horses were used by the city. Not surprisingly, Wayne County has 520,000 citizens receiving food stamps, over 25 percent of its citizenry, presumably with most of those located within the city of just under 707,000.

Dynamism and entrepreneurship have virtually disappeared while government jobs, dying industry and welfare have remained. When those with the imagination and drive to create new jobs and new industries leave in search of more favorable conditions for taking risk, the jobs of the future follow them.

Detroit is left with the jobs and industries of the past, propped up by federal investment and municipal credit that is now wiped out.

Can anyone please explain how the present in Detroit (and Bell, CA and San Bernardino, CA and Stockton, CA and Jefferson County, AL, . . .) is any different from the future of all the cities and states which continue to follow the very policies that destroyed America’s once-great motor city?


Jul 16 2012

Economic Reality and Government

C.M. Phippen

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” Frederic Bastiat

The newly upheld healthcare bill, passed by a president who can’t get anything right and always has someone else to blame for his failures, is supposed to add 30 million Americans (or non-Americans) to the “insured” category while at the same time not hampering accessibility or quality, and decreasing costs.

In fact, just after the Supreme Court ruling declaring the mandate unconstitutional but upholding the ability of the federal government to tax non-participation in the US insurance industry, every interview I heard with a supporter of the bill still claimed that it would save the federal government $100 million, even though every recent indication is to quite the contrary.

China is having some government v. free enterprise conflict of its own. In order to continue to grow the Chinese economy without causing inflation, which would be devastating to the 150 million Chinese living in poverty, the government has mandated that utility prices remain below market rates. Of course, we all know that if the government says something must be, then it simply must be.

The result is that private companies in China, refusing to operate at a loss, have been supplying power for fewer hours and have shut down record numbers of power plants for maintenance during the hot summer months. In some areas, power plants have stopped providing power for days at a time, leaving citizens without air conditioning, refrigeration or running water.

The chairwoman of China Power International has warned that if the government continues to enforce price controls, one-fifth of China’s 436 coal-fired power plants could face bankruptcy.

The fact is, there is a cost for goods and services, and a price below which no one will willingly produce or provide them. China’s largest electric utility, Huaneng, says that prices charged to customers should have been 13 percent higher last year to remain in line with the increase in coal prices; this year, spot prices for coal are up 20 percent because of various world events. All the while, the government is mandating almost no increase in the rate that utility providers can charge.

In order to deal with the lack of dependable power, some businesses have their workers come in at night or during odd hours when there are fewer blackouts, some restaurants have resorted to cooking over coals and hauling water by hand from wells. Additionally, the government has put pressure on the mines to sell coal at below-market rates, causing the best and purest coal to be exported while selling high-sulfer, high-polluting coal to Chinese companies.

At the end of May, at least six cargo ships carrying loads of coal from abroad were affected by deferrals or defaults on contracts by Chinese buyers as those ships remained full and waiting in ports with no one to pay. Of course, why would they when the government won’t allow utility companies to be adequately reimbursed for providing the electricity generated by that coal to consumers?

The Chinese economy is experiencing rapid deceleration and its potential growth is being hindered by bureaucrats who claim to honestly believe that their issuance of an edict will cause economic forces to fall into line behind their stated desires.

In the US, 83 percent of doctors who responded to a survey performed by a group opposed to Obamacare have considered leaving the medical profession as a result of “current changes in the medical system,” with 65 percent of those individuals pointing to government involvement as the main culprit.

We can look to Massachusetts to see that since the passage of state healthcare reform, there has been basically no difference in the usage of emergency rooms, doctor shortages abound and premiums shot up above the national average within two years and have only recently started growing at a slower rate.

In order to combat a nearly 50 percent cost overrun encountered with the implementation of the law, the state reduced costs by kicking almost 40,000 legal immigrants off of state health coverage and implementing free market principles which grant tiered health care plans to individuals based on, yes, their ability to pay. Free market principles are what finally brought down the rise in the cost of care in Massachusetts.

As for the rest of us, our president promised that with the passage of Obamacare we would see lower premiums, less federal spending and no additional federal debt, no taxes for anyone making under $250,000 a year, the ability to keep any current health plan if one were to so choose and greater access to health coverage.

Too bad saying it just doesn’t make it so.


Sep 6 2011

Government Business v. Private Business

C.M. Phippen

We all heard the news last week that yet another company on the President’s tour of success has declared bankruptcy. Solyndra, a solar panel manufacturer and, according to President Obama “a testament to American ingenuity and dynamism,” has sought bankruptcy reorganization.

In December of 2010, with less than one month’s reserves on hand, Solyndra sought to refinance by asking the Energy Department to subordinate $385 million of the $535 million guaranteed by the government. This would allow them to obtain an additional $75 million from outside sources. The Energy Department agreed, putting taxpayers behind new investors if things were to go wrong.

T.J. Rodgers, founder of Cypress Semiconductor and former Chairman of Sunpower, said on The Kudlow Report that on the day of President Obama’s visit to Solyndra in 2010 a secretary asked him what it meant that the President was there, visiting their competitor. He says that his response was, “Set your watch. That company will be out of business in one year.”

According to Solyndra President and CEO, Brian Harrison, “Regulatory and policy uncertainties in recent months created significant near-term excess supply and price erosion.” Regulatory and policy uncertainties? Huh, hadn’t heard that anywhere before. Looks like it might be a deeper problem than that, though.

According to Rodgers, the thin-film technology used by Solyndra is “lousy,” low efficiency and the cost per watt is double other technologies. He noted that the typical Silicon Valley startup is full of great ideas in a “crappy” building; Solyndra, on the other hand, built a palace which, according to reports, cost $700 million. The company also made the mistake of building their manufacturing facility in California, the worst state in the nation to manufacture, Rodgers added.

Solyndra’s cost per job amounted to $1.5 million, and now those workers are without jobs at all. Money well spent, or simply another attempt to override private markets and supplant them with an uninformed bureaucratic vision of utopia?

Rodgers, on the other hand, knows a thing or two about the solar panel business. In 2001, he invested $750,000 in SunPower, a solar panel manufacturer which uses a technology much more efficient and easier to manufacture than most others. Within a matter a months, Cypress Semiconductor, the company he built, had invested $168 million in SunPower, including the purchase of additional plants and equipment (Solyndra’s new plant alone cost $700 million . . . in this economy?). That company, by the way, is still around and growing despite management and R&D shakeups over the past couple of years.

Reminds me of the comment made by the Social Security judge, David Daugherty, who pretty much hands out Social Security Disability like candy (nearly 100% approval rate v. an average of 60%), “Some of these judges act like it’s their own damn money we’re giving away.”


Jul 7 2010

Cash and Corporations

C.M. Phippen

My husband was recently speaking with a friend who works for a large venture capital firm. His friend informed him that while companies have mountains of cash right now, no one wants to invest and he’s never seen anything like it in his industry before. The uncertainty of the financial markets, brought on by fear of increased taxes on investments as well as income, is so disconcerting that a state of paralysis has overtaken much of our economy and made growth nearly impossible.

Joe Biden has admitted that “There’s no possibility to restore 8 million jobs lost in the Great Recession.” During the presidential campaign, a common complaint was that Obama had no business experience. I’m afraid that when our country elected a man who, despite all protestations to the contrary, exhibits through his actions the belief that only government can save us, we got exactly what we voted for. Further, this is a man who never had to innovate, never had to make a payroll, and never had to worry about the bottom line; instead, he organized victims in the community, probably paid for by government grants, and then worked as an adjunct college professor with a guaranteed salary. Of course he and Joe can’t figure out how to create jobs (other than those short-term census gigs, but that might have more to do with the founders than this administration).

I know businesspeople who would be glad to hire more workers but they see absolutely no incentive or benefit in taking risks right now. If their gamble is successful, they’ll soon be paying nearly 40% of their increase in income to the federal government, and there’s always the pretty good chance that the economy really isn’t turning around and workers will need to be laid off, resulting in penalties to the employer through increased unemployment premiums. Why bother?

According to Karl Denninger at The Market Ticker, corporations are hoarding cash because they see things getting worse; if they saw growth opportunities, they would certainly be investing in them.

So, buckle up and hold on because this market indicator tells us that it’s going to get a whole lot worse.