Incentives to work

The economist has an article enumerating the problems with the American labor market. Among other reasons, the list amounts to poor incentives to work due to disability and unemployment benefits. I This combined with poor education and training resulting in obsolete (or lack of) skills. I believe that this is only part of the story, the main problem with the is structural. Government takes too much and gives it back to the wrong way, via entitlements. To regain America's superiority, we must return to the source of our greatness: innovation and opportunity. Innovation is the result of many small entrepreneurs trying new ideas and some of them eventually improving their consumers lives.

Entrepreneurship is being crushed by oppressive taxes and regulations for small businesses. Ask any small business owner and you'll discover that their biggest issues are all the expenses that go with hiring people other than wages: social security, insurance, benefits, etc. The government needs to lessen this burden in order to spur new jobs and allow innovation to occur.

Opportunity is the result of education and freedom. Freedom for the individual is the ability to work, save and invest in new opportunities without the burden of excessive tax or logistical restrictions like healthcare. Everyone wants to be their own boss. America used to be the place where immigrants with no education or money could work for a time and then start their own business to live and work as they pleased. Those times are long gone due to the cost and risk of living without health insurance. If healthcare were universal and/or insurance cheap, individuals would not incur such a large risk when they leave their employers to start their own ventures. Getting sick is one of the biggest fears unemployed people have. I was recently injured and unemployed and it was difficult trying to find care amid the bureaucracy of government programs and insurance providers (long story short, I never received the care that I paid for). If we can alleviate these fears, people will take more risks by starting new businesses and creating more opportunities for people to work.

Reducing the tax burden and associated entitlements, such as unemployement insurance and its ilk, America could both improve its competetiveness for entrepreneurs and create new opportunities for workers. The taxes that it does collect should go towards improving the quality of our labor force through training and education. Government should work directly with employers to determine what to train and in return be able to place people in those firms.

Basically, America needs to recognize what it does well and get back in touch with its roots. We were once the land of opportunity, but are now the land of government handout recipients and indentured servants. People can't leave their lousy jobs and work on their own terms anymore due to the large costs and risks associated with living without healthcare. Deadbeat socialist handouts is ruining the European economy, but government provided or cheap healthcare does have a rightful place in every society. Government doesn't have to be a vampire draining hard earned money from its most successful citizens to give to its least successful. The role of government is not to pick winners, it's to provide a solid foundation on which to build society. Handouts are not a solid foundation as they do not add value to society and are not sustainable. Deregulation and reduced taxes for entitlements does not just benefit giant corporations, but also the neighborhood shopkeeper and and the innovative technology start-ups as well. We need those entrepreneurs to make America great.

Obama != pro-business

Obama's claim that he is "pro-business" is ridiculous. Pro-business means being good to investors, bankers, and small businesses alike.

With regard to Investors, Obama has done nothing to reduce the taxes that are imposed on investors in the form of Capital Gains tax. Most economists would agree that a capital gains tax is bad for the economy. Investment is what spurs economic growth, and taxing the money received from investment reduces growth by reducing the incentive to invest.

Banks are vital to the economy and are hurting right now due to bad investments they made in mortgages. Mortgages are important to every home owner in America, and these banks were providing a service by securitizing them and selling them to investors. To make up for this bad investment, they must now replenish their capital stock any way they can. One way they are attempting to do so is by proprietary trading and market making. It is a more reliable source of profit right now than loans. As private companies banks have a duty to their shareholders to maximize profit.

Small businesses are hurting right now due to immense taxes that must be paid for each employee, such as social security, insurance, and other taxes. Small businesses employ more than half of the private sector workforce. To truly be "pro-business" and create jobs in this economy, Obama must reduce this burden.

Rove is a douche

Posted in response to this op-ed in the WSJ

Is Rove serious? Since when was putting more troops in Afganistan considered an anti-terror policy borrowed from George Bush? It is, in fact the opposite of Bush policy. Bush took troops *out* of Afghanistan to put the *in* to Iraq. Calling it a "surge" is semantic. Any troop deployment could be called a "surge" by that standard. His quote from the Washington Post is totally out of context. The full quote: ". It is difficult to imagine a truly level playing field that would simultaneously produce benefits from a government-run system. " the article goes on to say "Medicare keeps costs under control in part because of its 800-pound-gorilla capacity to dictate prices -- in effect, to force the private sector to subsidize it. Such power, if exercised in a public health option, eventually would produce a single-payer system; if that's where the country wants to go, it should do so explicitly, not by default. " I wouldn't call Medicare's negotiating power a "subsidy", since the private sector has the power to reject it's offers, but it is clear that the article does not dismiss public health care. I am not surprised that Rove is completely misleading in this article and I encourage others reading his editorials to challenge the "facts" he presents to support his case. I'm very disappointed in WSJ to continually have Rove editorials without sufficient editorials from an alternative viewpoint. Perhaps an editorial from John Stewart is in order.

Hoover and the Great Depression

Excellent reading on the anti-market intervention promoted by Hoover to keep wages artificially high and its effect on the Great Depression.  It contains a great argument against wage floors and other government intervention that artificially prevents markets from clearing.  

Finally!

I was relieved to discover this post on the Capitalism Blog.  It's reassuring to discover that other people have like-minded sensibilities.  

To paraphrase Gordon Gecko: Greed, in a word, is what makes capitalism work.  If we take "Greed" to mean "Self interest", it is also what makes evolution work in a Darwinian sense.  The fittest survive, while the weaker wilt.  As illustrated in many socialist societies, e.g. USSR, Venezuela, Cuba, Iran, etc. extreme socialism does not work as it works against the all too human psychology of incentive for work and requires military force to enforce its ideals.  Therefore, to condemn the recent financial crisis as an excess of greed is to condemn human nature, and the very process that made us humans.  

People who work for banks are employed specifically for their ability to make creative deals that are profitable to their shareholders.  In this instance, the internal controls to ensure deals made were consistent with long-term profitability were faulty -- most likely due to a misunderstanding of the risks involved due to a common mistake in interpreting statistics.  This will surely lead to private firms correcting such controls and tying reward to shareholder value.  We don't need more government regulation to tell banks what they already know: there is a fissure in the system that can cost them (and taxpayers) billions.  

Sucker's rally

Andy Kessler, a former hedge fund manager turned writer, says in the WSJ that the recent stock market run was a "Sucker's rally".  Of course, with 20/20 hindsight over the past couple of days this appears to be a correct assessment.  

Stock markets do not always reflect the fundamentals of the economy.  Just because the Dow goes from 6500 to 8000 doesn't mean the economy is all better now.  Jobs are still being lost in the hundreds of thousands every month.  Fundamentals haven't shifted, perceptions have.  Instead of proselytizing doomsday, investors have jumped on the bandwagon of rising stocks expecting to ride the wave back to 14,000.  Such expectations are misguided.  An handy rule of thumb is to watch the forecast Price to Earings (P/E) ratio.  Although forecast earnings may be an inaccurate gauge of performance, historical earnings may be even less accurate.  Many forcast P/E ratios were recently trading around 15, which indicates that investors are willing to pay 15 times what they expect shares a firm to earn in the next year in order to own its stock.  For many "value" companies, that is an aggressively high price.  A more reasonable level would be something like 10 or 12, or even less if earnings are uncertain (like they are now).  

Another important consideration not mentioned in the article is the newly enacted regulation restricting short selling.  After the rampant "naked" short selling that constributed to the collapse of banks like Bear and Lehman, regulators have sought more ways to prevent pessimists from betting against the stock market.  Surely many investors would happily short sell shares but are unable to do so.  This will keep prices at an inflated level for longer.  This recession has a long way to go before it's over, and cautious investors should be aware of the risks ahead.  

Cash for Clunkers, eh?

The upcoming program "Cash for clunkers", a US government sponsored program to replace old gas-guzzling cars with newer fuel-efficient ones, is another example of good intentions fouling up free-markets.  By creating a program that overpays for cars that otherwise would fetch a trivial market price (or would not be bought at all), the government is creating an incentive for people to buy cheap cars and sell them for higher than market value.   This incentive will "crowd out" buyers of cheap vehicles in the private market (read: young people looking for their first car, hobbyists, the unemployed, etc).  

I predict that at some point when this program becomes publicly acclaimed (my guess is many don't yet know about it) a portion of the used car market will get absorbed into the government's bloated budget.  While this may not impact everyone negatively, it may affect less affluent car buyers by reducing the inventory of used cars they might be able to afford.  Surely, it is politically popular with environmentalists.  However, it is unwise to interfere with supply and demand without properly investigating secondary effects on market participants.  Considering that the government is also spending lots of taxpayer money to assist the unemployed, this program seems potentially at odds with its programs to encourage employment (cars get people to work).  

Four Billion dollars is a drop in the bucket of approved government bailouts, but every dollar of taxpayer money should be thought out before it is spent.  This is one item in the federal budget that could be better spent.