Friday, January 30, 2009
If president Obama gets all he’s asking for the US economy, the percentage of debt owed by the US will go from 3% of GDP last year and 9% currently, to a number approaching 25% of GDP. If you make 100 thousand a year, go out and buy a new Ford Mustang Convertible on your Visa card and you’ll be in roughly the same economic condition as the US government next year.
And he’s almost certainly going to get everything he’s asking for. That stalwart conservative Olympia Snow gave in to liberal demands so quickly you’d think she was a New Jersey Republican instead of from Maine. If your from elsewhere and don’t know what I mean by that, picture Ted Kennedy in a Ronald Reagan mask collecting two or three pensions at a time, and lunching with Tony Soprano and you’ll have a good idea of what we’re dealing with here in the Garden State. I’m not usually much for those tests for political purity. But if I use the standards typical of the rest of the country, I can count all the conservatives in the NJ legislature on one hand and still have enough fingers left over to use chopsticks.
Anyway, while Ms. Snow is presently alone among Republicans supporting the bill, the Democrats will probably also be able to convince that eternal maverick John McCain to change sides. They’ll probably get a few others as well by buying them off with pork for their districts. There are precious few consciences on the Republican side of the aisle these days, not nearly enough to keep Obama from “doing something”.
And if you aren’t blinded by ideology or still too giddy from the great leap forward that America has recently made, the results of our new President’s plans are already easy to foresee. Roughly a Trillion dollars will be thrown down a hole in an effort to extend the government tentacles as far as possible into what has otherwise been known in the past as the private sector. Another two Trillion (at a minimum) will be borrowed to pay for an “RTC’ type solution to the banking crisis. It won’t stimulate much economic activity, but it will stimulate the hell out of Chris Matthew’s leg, and every tiny uptick of anything anywhere will be credited to Obama’s omnificent vision by his adoring fans in the media.
But there is good news. I’ve figured a way for the US government to keep from collapsing when all this debt finally falls in on itself. And if I’ve figured it out today, then sometime in the next ten years or so (before it becomes absolutely necessary), someone in government will almost certainly be able to figure it out as well. Basically, it’s going to go like this:
Once the debt for Medicare and Social security start getting added to all this bailout money, our anemic, newly socialized economy will not be able to generate the growth necessary for the government to be able to meet its obligations. And rather than facing the political risks of cutting spending, our elected officials will instead choose a Venezuelan option. They’ll decide to inflate away the domestic debt by printing enough money to retire it, and in negotiations with our foreign debt holders, they’ll raise the option of defaulting on the foreign held debt.
Any second year economics student could tell you that if we were to default on our debt it would almost certainly mean the collapse of the Chinese government and god knows what would come from that. So instead, someone will quietly go to the Chinese and negotiate the repurchase of the debt they hold at a post inflated currency price. It’s just speculation of course but I’ll bet that it could be structured as a swap for US dollars and described by the Treasury to the dimwit media as a sign of confidence of the Chinese People in the American greenback.
Of course, the Chinese are too smart to go for this deal alone because the government could just start inflating the currency again after the deal is done. They would want some assurance that the US government won’t just get back to its old tricks. And the US government will give it to them. They’ do it by making the entire deal contingent upon the US going back on the gold standard. Ordinarily you would never expect our politicians to give up the power to inflate the currency, and until it’s their very survival on the line I don’t think they will. But when it comes time to make that deal it will be clear that they can either do it, or face American Revolution 2… the sequel.
Strict libertarians have been going on about the gold standard for years and rightly so. But it always seemed to me that they felt it should be done as a moral imperative. Personally I’ve always found that unconvincing, and if they can’t convince an Austrian school guy like me, you can just imagine how our feckless elected officials have reacted.
Mostly they’ve considered the people calling for the abandonment of the Federal Reserve as harmless cranks. They were seen as the political version of those two old guys on the Muppets who sat up in the balcony complaining about this or that. (If I’m not mistaken one of those guys did bear a resemblance to Ron Paul.)
But this is another one of those, “be careful what you wish for” type of events. We’ll finally get the gold standard, but we’ll get it at the expense of the American people. The US and Chinese governments can use this plan to hit the reset button on the global economy without any real political consequences, and all the debt will be wiped away. But poor people in America will end up with the same standard of living as poor people in Peru, or Algeria, or Nepal. They’ll be cardboard box cities in parts of LA, Miami, and Houston but all the people who live there will be entitled to free government provided health care.
And liberals will finally get what they wanted; a world where everyone has been made equal. And they’ll have done it the same way they always do…by making the richest country in the world equal to the poorest. There’s a joke I mentioned in another post about the two Russian’s, Boris and Vladimir who were the same in every way except Boris had a goat and Vladimir didn’t. So one day Vladimir found a lamp on the side of the road and when he rubbed it a genie popped out and said “I can only grant you a single wish but it can be anything you desire”. Without hesitation Vladimir instantly said “I want Boris’s goat to die”.
That’s where liberals in America are today. They’ve finally found their genie and his name is Obama. And he’s going to grant them their greatest wish.
Friday, January 23, 2009
Rome fell, in large part, because a great many Romans never believed it could. If you think about the scope of what the Roman Empire accomplished, such a big mistake becomes easy to understand. Rome ruled the world from Persia to Britain. Their military forces had vast technological and training advantages and were usually fighting against what amounted to the local village strongman and his friends. They built structures and cities which were unprecedented in scale and built to last a thousand years. Their libraries, their knowledge their civilization, were all the dominant force in the world. And yet Rome still fell.
Rome wasn’t beaten by its illiterate foes from the north, the Vandals and the Goths. Those tribes just inherited the already hollowed out empire. By the 4th century the northern tribes were fighting against a civilization that lacked the will to prevent its own destruction. It was the empty shell of the former Rome. It had all the structures and size, but it lacked the guiding purpose. By then the empire had spent decades focused on pandering to the frivolity and ego-centrism of its rulers rather than those tasks which brought the empire greater strength. And that had sapped the once great Roman army (and for that matter the Roman people) of their will and their reason to fight.
But to the ruling classes of the day it must have seemed a small issue. Why not focus on ingratiating and politicking? The empire was as permanent as the sun right? Nothing could ever topple the greatness or Rome… nothing could even compare with it. So if the resources of state were being spent on the excesses and extravagances of the emperor du jour, what of it? “It’s not like the empire will crumble if one more palace was built or if another military campaign was put on hold till next year” they must have said to themselves. It’s no doubt they had an equivalent to global warming and Guantanamo which they felt was far more important than reinforcing some garrison on the Danube. They were more concerned about what made the powerful people feel good about them than addressing the genuinely critical issues of the day.
Decisions like that were slippery slopes. No one could imagine the empire withering no matter how severe the excesses, and since that was so, no amount of excess could ever be seen as too severe. It didn’t matter how much was wasted or how it was thrown away. All manner of arbitrary and capricious behavior was tolerated, and even supported by those whose politics were favored. In their minds it could do no harm because Rome was as ever present as the sheltering sky.
I’m sure you can see where I’m going here. Our empire, the empire of the west, is pretty clearly in decline. And the thing we have to fear isn’t the Arab world or the Chinese. The idea of them ‘conquering’ the west is as unrealistic as some Dacian village strongman and his 40 farmer/soldiers conquering Rome. It’s not going to happen… in truth, it never was. What will happen however is that they will be the people who inherit the shell of the once great western world, after it’s been hollowed out by the western liberal intelligencia, and their focus on the frivolity and waste of modern liberalism.
Some might have a hard time imaging that. But suppose the Obama administrating after winning a second term, takes a look at the multi-trillion dollar deficit they’ve created and then decide that the only way to pay for it all is with a mammoth tax on ‘the rich’. Suppose they implement a return to the tax levels under John Kennedy where the top individual income tax level was set at 91%? That will cause economic activity to slow, but more important, it will take away the incentives for the rich to remain American. They want to use ‘patriotism’ as the chain with which they make the productive into slaves for the benefit of the unproductive. But they forget that the rich can simply leave.
My wife has an old friend from childhood who is now a neurosurgeon, and teaches at an Ivy league Medical School. Like most people who escaped communism, he’s a conservative by today’s political standards. He’s done well for himself in America, but faced with the idea of punitive taxation, nationalization of his industry, and restrictions on his business and freedom, he’s now thinking about leaving. That’s lucid and rational if you ask me. He’s worked hard and is entitled to make the most of his effort. No one ever gave him anything in America except opportunity, and now that he’s made the necessary investment in money energy and time, the government wants to effectively renege on the deal. But he’s having none of it.
Where is he planning on going? Bahrain. He can work there with no tax liability which will greatly increase his net income. He’ll be working with cutting edge technology and top level people. He’ll be providing his service for whatever the market will bear, and doing so with relatively few restrictions. In short, he’ll have the kind of life there that he originally came here to the US to get. But now that the kind of opportunity he was looking for has become a thing of the past in America, he’s going to go where it’s still a thing of the present. And I’m sure he’s just one of the first of many.
Obama wants him to share the fruits of his labor at the point of a gun. But the net result is that instead, the Arab world will get a first rate medical mind and better access to the best care available. That won’t affect me at all because if I need a neurosurgeon I can always afford to get on a plane and go see him. It will be harder for the poor to get a good doctor, but that’s the way it goes. After all, they will still have hope. But they had better hope they don’t need a neurosurgeon because all the best ones will be living in the Persian gulf. I guess that’s one of those issues they never quite thought through. How exactly does free medical care for everyone work when all the best doctors have gone to live in other countries?”
The Arab world isn’t going to defeat the west militarily. That may be the stuff of Iranian election speeches and terrorist PR videos, but no one seriously believes it. But the fact is, the Arab world doesn’t have to beat the west because the west is beating itself. All they have to do is offer the west’s most productive citizens a better deal than they would otherwise get in their home countries, and in a decade or three they’ll be the top dog. And with the west thoroughly hollowed out by its focus on frivolity and egotism, there won’t be anyone left who’s able to stop them. Animals will have rights in America, and producing CO2 will be illegal, but no one will be able to get a decent doctor.
On its current trajectory the west will collapse under its accumulated debt burden, sometime in the next 18 years or so. You can’t tell any difference between our two political parties based on policies but even if you could it wouldn’t matter because neither has the political will to change our course. Eventually it will be clear to everyone that, like Rome, we’re on a failing trajectory, but by then it will be too late. So while Obama is fiddling and we are waiting for the fire to spread from California, and Michigan and New York, the smart move is to start inching toward the lifeboats.
Tuesday, January 20, 2009
My buddy Tim has gotten in the habit of telling people that when it comes to the economy, he “wants to get his package stimulated”. Everyone thinks it’s funny except his wife. And let me tell ya, the package which team Obama is talking about is larger than any they’ve ever seen in Washington DC; a town that is all about size of your package and the larger the better. As many an American taxpayer can testify, they have always had a lot of big packages in DC, and they always seem to be doing the same thing to the taxpayer’s with them. But even on that scale this new one is a shocker.
According to our 44th president, he plans to spend roughly a Trillion dollars which he’s going to borrow from our children and grandchildren by issuing debt. He’s going to spend it with the intention of generating 3 million new jobs, 80% of which will be in the private sector. But that means that 20% of the jobs will be in the public sector… 600,000 new government jobs. And that depressing statistic tells you all you really need to know about Keynesian economic stimulus.
The truth is, when it comes to this stimulus package, size doesn’t matter, because the money will be spent in a way that impedes growth rather than encouraging it. In effect, the money will be wasted. Well … maybe not all of it, there is the occasional tax cut in there that might cause someone to actually produce something. But the vast majority will be thrown away on make work projects in Democratic districts, and a legion of community organizers. And that waste will be enough to reduce the economic return on this government ‘investment’ to a number so low that we’ll all regret having gone this way.
Think of it this way… An economy is like a Marathon, and you need lots of energy to run one. The best way to get set for that marathon is to work hard over a long period of time to get in shape. Make your heart, lungs and muscles into highly efficient machines that make absolute best use of the energy you provide them. This makes them strong and able to bounce back quickly from any external shocks or stress. You eat a well balanced diet while in training, but the night before the race you may load up on carbohydrates to bank a few last minute calories.
But that’s not what American society is doing. Instead we’re sitting on the couch complaining about how fast some of the other runners are. We talk about their unfair training practices or that their limbs (their labor market) are naturally more efficient than ours. We complain about their determination and demand that the rules be stacked to favor middle aged pot bellied retirees who sit on the couch all day. Then the night before the race we load up on sugar, caffeine and nicotine in the hope these drugs will give us the stimulus we need to run the race.
That sugar, caffeine and nicotine are the Obama stimulus plan. Will it stimulate the economy? Sure… in the short term it will stimulate the hell out of us just like sugar, and nicotine. But it won’t get us back on track. It won’t make our economy any more healthy and efficient. In fact, once we start to feel the after effects it will be clear that it not only didn’t help, but it actually hurt. The after effects of sugar and nicotine are a bloated waistline, a hacking cough, and maybe a few more serious diseases like Diabetes and lung cancer. The after effects of the Obama stimulus plan will be a bloated public sector (along with a bloated public debt), a devalued currency, and maybe a few more serious diseases like a widespread tax revolt, or credit devaluation.
Obama’s plan is to produce 3 million jobs with infrastructure projects. But the people who are losing their jobs are real estate agents, well fed UAW line workers, and Wall Street executives. Maybe it’s been a while since Obama has spent any time with the common folk, but the guys I know on Wall Street don’t know much about running backhoes’ or driving tractors. What he’s really going to do is create 3 million jobs that Americans don’t want to do, and that’s exactly who’s going to end up doing them. In New Jersey for instance, 280,000 illegal aliens work in the construction trades and will be the inevitable recipients of the relief for the homebuilder’s association that governor Corzine has been going on about.
Some in Congress say that we should train Americans to do those jobs, but that’s not the problem either. Any chump with a degree in Art History or Women’s Studies can swing a hammer or push a wheel barrow. The thing we’ll need to train Americans to do is to get by on $12,000 per year like the rest of the Guatemalan carpenters. But if I’m not mistaken, the Obama administration has a solution for that too.
Rather than borrowing the money from future generations they’ll just print money and pay off the debt today. That will kill 2 birds with 1 stone. The federal debt load will be conveniently reduced getting rid of one of those nagging statistics that politicians would otherwise have to try to distract people from every four years or so. And the unemployed $200,000 per year executives will all get jobs (and shovels) with the federal department of hole digging and refilling that pay them the same $200,000 per year that they made in their old jobs. Of course with all that inflation it might buy just a little less… but I’m sure Team Obama has a plan for that too. They can just use the economic emergency as justification to ‘fix’ (that’s fix as in “make permanent” not fix as in repair) prices. And I’m sure that can be done with no serious consequences so problem solved.
Some might say that Obama’s package is so big, that we’ve just got to get some stimulation from it. Well not to be wet noodle about the whole thing but in this case, size really doesn’t matter. There is no amount of money so big that government can’t waste every penny of it. It kind of reminds me of that movie from the 80’s with Richard Pryor, “Brewster’s Millions”. In order to inherit 300 million dollars a minor league ball player has to utterly waste 30 million in a month and have nothing left to show for it. He finds it tricky at first but eventually gets there by spending the money running for public office.
Obama’s problem is the inverse of Pryor’s. He needs to spend a Trillion dollars and somehow avoid having nothing to show for it, in order to get reelected to public office. Throw in Jack Black as his VP/Best Friend to play the role John Candy filled in the original, and find a way to work the New York Yankees into it and you’ve got a film deal. Someone get the screenwriter’s guild on the phone.
Some might complain that Obama’s not as funny as Richard Pryor but I don’t see that as a problem. Everyone knows that if you’ve got a big enough package, you don’t need to be funny.
Thursday, January 15, 2009
It ain’t over yet. Like a ripple in a pond, the financial crisis has spread to the limits of the modern economy and what started as a ripple is now on its way back to the center much amplified. Business have reacted to the slowdown by cutting costs (firing people and cancelling orders) which caused others to fire people, and so on and so on. And now the consequences of that have caused the banks to raise their estimates of foreclosure and lower their estimates of growth.
In the meantime we’ve all apparently forgotten what a market is. We think, in keeping with what we’re told by our politicians and the idiot press, that the stock bond and currency markets are a great casino occupied by fat cats and their victims. We’re told that the people who work there are ‘parasitic paper pushers’ who don’t really add anything to the economy. We’re told that they’re designed to be unfair to the little guy, and that the big players have built the system to ‘exploit’ the widows and orphans. None of that is actually so.
In reality the financial markets aren’t a Casino, they are an alarm system. They use the wisdom of crowds to look into the future and make a prediction about the effect of the current government policy. They are the place where people exchange information about how optimistic they are about the future of the economy. They are the only truly honest place where we get everyone’s best estimate. The polls and the press are all twisted to reflect what the politicians want them to, but there is no twisting the market.
It isn’t really possible for any individual to manipulate the market. People have tried of course, and the financial graveyard is littered with their bodies. People will tell you different because they were ‘so sure’ of something and when the market went the other way on them it’s easier for them to claim that it was manipulated than it is for them to admit that they were wrong. Liberals blame the hedge funds, and conservatives blame George Zoros, but neither is right. That’s just their hurt egos and their envy of wealth.
The fact is, the only entity with the required authority to distort the behavior of the market is the government. By changing the rules in a foolish or inefficient way, they can make the whole herd run one direction or the other. But the markets are an alarm system. And the more the government tampers with the alarm system the less effectively it sounds the alarm. That’s what happened with the ‘credit crisis’. Government rules distorted the behavior of the free market, so when too much easy money was made available, the alarm never went off.
We haven’t learned that yet. We still believe in fairy tales. We still believe the childish silliness that ‘hope’ alone can change immutable laws of nature. We think that ‘green jobs’ will save the economy by raising the cost of energy; that a windmill can power steel factory; and that ‘government’ is the only thing that can save us now. We believe that the best way to create economic growth is to take money from the most productive people and give it to the least productive. And it’s the stated policy of our government to spend as much taxpayer money as possible on the people whose poor credit caused this whole problem in the first place. The harder the government tries to “solve” this crisis the worse things will get.
The alarm is going off, but we’re still ignoring it. A good friend of mine, a blisteringly intelligent man with decades of experience in finance told me last night that he thinks national unemployment will go to 12% before we hit bottom. That’s roughly one person in every eight. And what no one in the press seems to want to mention yet is that the job loss will be much heavier in the blue states than the red. It’s the adolescent policies of liberals that have created this problem so the bluer the state, the worse the stats. In a way, that’s the good news. The lessons of the recession will be learned by the people who need to learn it the most.
Hopefully it will make us all grow up a little and quit ignoring the alarms.
Friday, January 9, 2009
I stand 100% behind my original assessment of Sarah Palin. If she were the kind of person who rolls over and surrenders because the cool kids made fun of her then she wouldn't be the Governor of Alaska. More than anything else it's determination and will that is the mark of greatness. And there will be no sucker-punch from Katy Couric the next time around.
Monday, January 5, 2009
My eight year old daughter is the new queen of monopoly at my house. This past weekend she crushed both my wife and me in an epic battle for control of the Atlantic City real estate market. How did she do it? She triumphed through a clever combination of diligent savings, prudent investment, and landing on Free Parking not once but 5 times in a row. Not to take anything away from my daughter’s mightily won victory, but it’s fair to say that luck does play some small part in Monopoly, just as it does in real life.
My daughter is of the age now that I really enjoy doing most anything with her. She has such a great sense of humor that she can make almost anything fun. But you can see that you’re going to lose at Monopoly way before you mortgage Mediterranean Avenue and they actually close the coffin lid. So while we grown-ups waited for our inevitable demise, it occurred to us that the game doesn’t really reflect the pressures and challenges present in New Jersey's 21st century business community. So we came up with a few ways that we could modernize the 'Chance' and 'Community Chest' cards to make the game a little more accurate for the current business climate.
Personally I think it would be big fun to discreetly print these off on yellow and orange card stock, and mix them in with the normal cards. We considered doing so and then selling the new cards on eBay, but it’s almost certainly a copyright infringement. We weren’t looking to make trouble, just to have a little fun. So instead I leave that to the reader to try on their own. Also, you’ll probably notice that we only used the character with his pockets turned out. That’s because in the modern world anytime the government gets involved it’s always bad news for someone.
The first one we came up with is this:
The reality of dealing in beachfront property in New Jersey is that you only own it at the discretion of the local government. Thanks to Kelo vs. New London, politicians can seize your property any time they like and give it to someone else to develop for greater tax revenue. We tried to think of a way to work a bribe into the card so that it would more closely match he current ‘real life’ political environment, but it was too unwieldy. Instead we don’t give you the chance to be as dishonest as the next guy, and simply take your property.
Next is this one:
Inflation makes all prices rise, so the same effect can be achieved in the game by simply taking money away from everyone. This punishes anyone who has been saving cash, just like actual inflation. If you’re wondering how this is like real life, you won’t be this time next year.
Then came this:
New Jersey has the highest property taxes in the country and in my case, they are actually higher than my mortgage. People who have made the mistake of investing in real-estate are punished every year in New Jersey, but thanks to the poor performance of the union dominated school systems, no one seems to notice. No one can connect rising school costs with rising taxes, but we still find time for sex education in the grammar schools. Thanks NEA.
Both John McCain and Barak Obama wanted to spend taxpayer money to help out homeowners who couldn’t afford their mortgages. But those are the very people whose irresponsible behavior caused the whole real estate problem in the first place. Government wants to reward people who act badly and punish people who act prudently. Since everyone in Monopoly is on pretty much the same level morally, with this card we’re simply punishing the lucky, and rewarding the unlucky. If it turns out that you’re both people, then this card is exactly as effective as most government bailout plans.
Paging Barbara Boxer. There are no drug or oil companies to nationalize or industries to stick with a punitive windfall profits tax. Instead we’re just taking them away from you. If you want to believe that this will somehow ‘save the planet’ that’s fine with us. Whatever makes you feel better… but hand over the cards all the same.
Of course, government action isn’t bad news for everyone, and it is particularly good news for those who work for the government.
With this card you get a government job. Governments don’t actually produce anything they just shift it around. So you will get paid the next time someone else does something … like pass go. But there is something even better than a government job.
With a government pension, you get paid forever from someone else’s work, whether you do anything or not. For the reader who is thinking about adding these to their game: I think at least 2 of these cards should be printed out which would give at least one player the chance to ‘double dip’ and collect multiple pensions at once. Personally I would add one card to the deck for every player, and 1 extra so that it will reflect the true economics of the government pension scam. Thanks Sharpe James.
Then finally, when the game is so convoluted that no one can tell who gets what from what action anymore, we have this card:
This one hasn’t happened yet but you better believe it will happen soon. Some estimates put this as close as 3 years from now. Personally, I think it will take longer, but there is no way it could be more than 15 years from now. That’s when we ‘run out of line’ on the federal government’s mismanagement. As for New Jersey, it might turn out to be sooner, but I don’t really know. We’ve never seen such a large municipality declare bankruptcy before, but at the rate things are going we almost certainly will. And this card is a good reflection of what will happen (and who it will happen to) when that occurs.
Feel free to add these to your game. Thanks to monopoly you no longer need to live in New Jersey to have your rights taken away and to be made a serf. Now you can play along at home while we play along in real life. If we're all going to be Keynesians now, there is no reason our games shouldn't reflect that. And if you think these new cards make the game more arbitrary and random than it was before, or that it's unfair to simply take from some players and give to others then you can appreciate how things really are in New Jersey.
And where New Jersey goes, the country now seems to follow.
This has turned out to be my most frequently emailed post ever. There are a few more card suggestions in the comments section, and these have also come in as possible additions:
You can't screw up the housing business without involving the ESA. The endangered species act is arguably the single most abused legislation in American history. Animal rights zealots have used it to prevent development since it's inception. Now it's effect can be felt in Monopoly too.
And here is another that needs little by way of explanation:
Saturday, January 3, 2009
There is something fundamentally immoral about a government that takes taxes from citizens in Nevada, Utah, and Oregon by force, only to give them to governments in New Jersey Massachusetts, and Ohio just because they don't know how to manage their budget. They call it "federal assistance", but it's really theft... out and out theft. And to give it to those states would set off a race to the bottom unprecedented in American history.
These governors are hoping that we are all so deranged as to DIRECTLY reward those people who have behaved the worst. Because they are incapable of standing down their entrenched special interests, they want the federal government to give them even more money. It's like punishing our badly behaving children by making them eat cake and candy for dinner. It will come to no good end.
How broken are things in Trenton that the governor would rather go out on the interstate with a sign that reads "Will Beg for 1 Trillion in Tax Revenue" than stand up to the unions and bureaucrats in Trenton to actually cut the budget? The man is literally making a public spectacle of himself. He's portraying himself as the worst kind of weak kneed coward because he's afraid to stand up to the thugs that run his ex-girlfriend's union. He's a Democrat and I'm not... I didn't even vote for the guy and I'm embarrassed just to be watching him.
Jesus Jon... be a man... do the right thing... just a little. I know the people you listen to day in and day out won't like it but the electorate will. I know the Democratic machine says the voters will be upset... what do you expect them to say? It's their interests you'll be cutting out. In reality 'the people' would love to see the budget slashed and taxes cut. It's only the people in government who think otherwise. They've been giving you bad information.
Once... a long time ago, you were a man. Once you saw yourself as a guy who stood up to the people who were making things worse. Well now it's the people in the government who are making things worse and you should stand up to them. If you made deep cuts in the budget and corresponding cuts in taxes it would be a mitzvah for the people who elected you. It would be setting things right in the state. It would be you doing the thing the people of New Jersey elected you to do. Please ... please don't be one more embarrassing governor for New Jersey. We're sick of being embarrassed.
Please don't shame the people who elected you anymore. Don't make us all go from the corrupt deviant to the billionaire who begs. I'd always hoped it was beneath you, and it's certainly beneath us. We deserve better from you than this. We're already a national laughingstock in New Jersey. Please don't make it worse.
Friday, January 2, 2009
A few months back, I was asked to submit some testimony on what I thought the impact of the financial crisis would be on the NJ economy, for the legislature's Labor Committee. So far I think it was pretty much on the money, and the things that haven't already happened are all looking to occur this year. But more than just a statement about the financial crisis, it's a comment on the broader issues surrounding the NJ economy. This has attracted some small attention because of Bill McGurn's piece in the Wall Street Journal calling New Jersey a bad example to follow. If Obama does follow it, then I suppose we can expect something similar to this on a national scale as well.
The broader US economy is much more diverse than the economy of NJ and that will mitigate some risks while causing others. NJ has no auto industry to bail out. But while the numbers may differ slightly I think the broader effects will all apply on a national scale, so this is now my prediction for the US for 2009 as well.
Here again is that piece:
Testimony Submitted 9/22/2008 to the Labor Committee of the New Jersey Legislature:
My name is Tom ------------ and for the last 19 years I’ve been employed as a quantitative analyst and portfolio manager in the financial services industry. I started my career at JPMorgan, but for the last 11 years I’ve been working for multi-billion dollar hedge funds like ----------- and ----------. Much of my work has been dedicated to developing an understanding of market crises like the one we’ve recently witnesses, and I hoped it might help to offer the perspective of someone who makes their living dealing with circumstances like this.
As you can imagine, there are many questions about what the effect of this crisis will be, but some aspect of our economic future are already set is stone. So I’d like to take a moment to tell you about some of the more certain consequences of our current circumstance, and how they will change the economic condition of New Jersey in future weeks and months.
In a few weeks, a plan will be put in place for the federal government to take on a large portion of the devalued bonds that were the initial catalyst of this crisis. That will greatly expand our national debt. The current package approved by the government is for 800 Billion, so that can be thought of as a minimum. Further insolvencies might push it substantially higher than that before the crisis is over. This makes our national debt so large that the politically viable alternatives for either political party to deal with it begin to diminish dramatically. In the end they’ll have no choice but to embrace the “Japanese Solution” which is to dramatically inflate the currency and to hope for economic growth.
This will affect the New Jersey economy in several ways. First, to raise the 800 billion dollars they need, the federal government will issue Treasury bonds, and that will cause interest rates to rise for everyone. So it follows that the cost of borrowing money for the state government will be much higher than it has been in the past. Thanks to rising costs for government labor, a massive unfunded pension liability and other heretofore unaddressed expenses, the balance sheet of New Jersey’s state government is already in strained condition, and significantly higher interest costs will push it close to its limit.
New Jersey will also be dramatically affected by the cutbacks in the financial services industry. Even if further failures are prevented, estimates of the total number of unemployed for the greater New York area are already in the hundreds of thousands. The financial professionals who will be unemployed spent a great deal of money to support doctors, car dealers, contractors, stationary stores, restaurants and other businesses. A significant part of New Jersey’s total economy was driven by financial services and all those who provided them their services will also feel the pain. It’s not just some fictional “fat cats” who will bear this burden, but everyone.
The combination of the strained balance sheet for the state and the dramatic drop in tax revenues from high unemployment will almost certainly bring the New Jersey’s credit worthiness into question. In the past New Jersey’s made great use of the very same tools and products that have just blown up in the Mortgage market’s face. Bond insurance and Credit Default Swaps will no longer be viable tools for reducing the states interest payment’s on its debt and with the states credit worthiness in question, New Jersey’s cost of borrowing will rise even higher.
In the meantime, economic activity in New Jersey will slow to a crawl. Thanks to the high taxes and heavy handed regulation already in place, New Jersey already has a higher unemployment rate than the rest of the country. But the contraction of the financial services sector will strike New Jersey directly, and will make conditions in the state much worse than the country in general. Nationally we’re headed toward a recession. And with the present policies in place I would expect the unemployment statistic in New Jersey to reach 11% or 12% at a minimum. If any new “anti-business” regulation is added or taxes are increased, then it will likely be even higher. Either way, since current policy will cause the economic recovery to take longer here than elsewhere, the most productive members of the population will leave in large numbers as they abandon New Jersey for jobs in the low-tax, pro-business states in the west and south. In short, with the present policies in place, ours will be a deeper trough, and a slower climb back than most other states.
I referred to the unemployment “statistic” a moment ago because I would expect real unemployment to actually be much higher than that. Roughly 280,000 people in New Jersey work “off the books” either because of a lack of legal work status as immigrants, or to avoid the minimum wage laws and other obstacles to low income employment that government’s put in place. These people don’t show up on any employment statistics, but they represent such a large “underground economy” in New Jersey that the effect of their absence will certainly be felt. I would expect productivity in the construction sector in New Jersey to fall 80% at a minimum, and for a similar percentage of the foreign nationals working in New Jersey, to simply return home as rising prices and high unemployment make conditions here more closely resemble those in the countries they left behind. This loss of population will also affect the demand for housing, so the resale of existing homes will likely drop as well.
In the meantime on the national scale, all prices will begin to rise dramatically as the government allows the currency to inflate as a means of reducing its debt. In the hope of generating economic activity, the fed will push short term rates to new lows, but indecisions about the future and the threat of additional regulation from government will counter the effect and keep economic activity and confidence about the future low. Productivity will fall, and the economy will slow and eventually begin to contract. A national recession under the next administration is a foregone conclusion.
While all of this takes place, the most economically and historically ignorant in government and the media, will be demanding that government “Do Something!” They’ll be presenting this as a failure of capitalism or claim that it was caused by deregulation; neither of which is true. Operating from a position of complete ignorance of history and economics, they’ll be demanding a “New - New Deal”. They’ll call for policies with the intent of “helping people” but in reality they will be ensuring that those same people remain unemployed, and that the economy goes into freefall.
It won’t occur to them that they’re contradicting to the academic consensus that the policies enacted in the 1930’s made the depression much worse than it could have been. They’ll remember the myth that it solved things, rather than the reality that it actually made things worse. And because of that ignorance, they’ll demand new anti-business policies that make them feel better about themselves, but which really cause greater harm to the very people that they want to help. And while each political party will certainly be busy blaming the other as the “one who caused all this”, it’s already clear that it was policies endorsed by both parties which actually created the cause of this crisis.
So if a “New - New Deal” will cause more harm than help, what’s the State government left to do? Without command and control economic policies and fixing wages and prices like Roosevelt did, what options does the State have left for improving conditions of its citizens?
Well ironically New Jersey is one of the few states that actually has the power to cure locally what was caused for it nationally. And the answer is its unusually high tax rates. Every state in the country is about to see a period of rising prices, higher interest rates, and slower economic growth. The result will be a reduction in the “standard of living” across the entire country. But if the state legislature could seize this moment to adopt a pro-business, light regulation and low tax economic policy, the pain of the coming economic contraction could be kept to a minimum for everyone. With cuts to tax rates and to government spending, New Jersey will become an economic lifeboat in the sea of financial troubles. And when the trouble has past and the economy begins to grow again, New Jersey will be a clear leader in the next economic expansion. By seizing this opportunity the New Jersey legislature could create an engine of unprecedented wealth creation, and make New Jersey the envy of the nation. Or it can reduce its remaining citizens to bread lines and welfare roles, while it’s best and brightest flee.
This financial crisis will create great challenges for everyone. But we aren’t powerless. New Jersey’s future can either look like Monaco, or it can look like East Germany. Low tax pro business polices will lead to one future; high tax, strong regulation policies will lead to the other. At this point we can either learn from history, or repeat it. There is no third choice.