"It's the Economy Stupid"

The title quote is largely attributed to James Carville during the first Clinton campaign for President. Well, at least it can be said that Carville got one thing right! Of course it’s the economy. It’s always been the economy. It’s always going to be the economy. Why? It’s the economy because without a strong one, there is nothing else. There is no national defense. There are no entitlement programs. There is no discretional spending. Nevertheless, President Obama, and Congress have not caught on to this as yet, and continue to spend us, and future generations, into oblivion. Any issue other than the economy is simply distraction, and unfortunately, distraction is big business, and big money, inside the D.C. beltline, so, as a result, we have the ill-informed, voting on the basis of feel good non-issues such as race, “green” jobs, women’s rights, gay rights, gun control, taxing the rich, unemployment benefits, the minimum wage, the Kardasians, and who knows what.

 The field of economics is called the dismal science for a very good reason. Put a dozen economists in a room, and you will likely find at least two dozen different opinions.  Beware of arguments by pundits justifying their opinions with the catchall phrase “economists say…”  As if, you should be impressed because “economists say…” whatever. You don’t have to look too far to find economists that disagree. Like medical and scientific opinions, there is wide degree of disagreement within the field. Newsflash….science is not a democracy. The majority does not rule. If the science was over, as Al “Jazeera” Gore would have you believe regarding global warming, or if you prefer “climate change,” why does every article written about scientific subjects in the news contain the disclaimer “more research is necessary”?  Hey Al, while I’m on it, why is there so much money spent on global warming, I’m sorry, climate change research if the science is “over”?  The answer is because it’s never over. There’s always more research to be done. It’s all too common in the history of science that the findings of previous generations of scientists are refuted.

If a little knowledge is a dangerous thing, then what’s a lot of knowledge, even more dangerous? Highly intelligent, highly educated scientists, the elite, are still vulnerable to human foibles. They lie, they cheat, they steal. They want to be relevant. They need to be relevant. They are driven to be relevant. They seek validity. Sometimes, they are blinded in their desires for relevance, and validity. They become so focused on what they “know”, within their little cocoons, that they become disjointed from the real world. Because they are intelligent, and, no doubt that they are, they often, mistakenly, extrapolate that they are smart in areas beyond their expertise. Even within their expertise, they are only “smart” within the confines of their specialization. In the big picture, they still know very little. I have worked with many PhD scientists. The overwhelming majority of them seemed to have little connection to practical reality. A significant minority of them could barely tie their own shoes. It is a rare PhD that relates well to the real world. Just because someone is intelligent, and is highly educated, does not mean that they are right.  Experts can be wrong remarkably often, especially in the field of economics (John Maynard Keynes comes to mind).  We live in the information age.  Nobody said anything about wisdom.  Knowledge and wisdom are completely independent of each other. We have become saturated with massive quantities of information. Unfortunately, our brains have not evolved fast enough to keep up.

In his book, “Contrarian Investment Strategies: The Next Generation,” David Dreman cites numerous studies that document the inability of “experts” to process greater amounts of information.

“In fact, ingesting large amounts of investment information can lead to worse rather than better decisions.”

Dreman continues that more information tends to give us increased confidence in our faulty conclusions.

“…people in situations of uncertainty are generally overconfident based on the information available to them, believing they are right much more often than they are.”

The effect of massive information on the overconfidence in, and poor quality of decision making, was shown to extend beyond investment analysis.

We know from the studies cited by Dreman that “experts” often have poor track records under conditions of uncertainty.  What about politicians?  During weak economic times, politicians are driven to “do something.”  Action is better than inaction, right?  In fact, in the case of the government, inaction has a better track record than action.  The demand for action begs the assumption that politicians, and bureaucrats actually know the right thing to do.  Naturally, they profess to know, and are likely to have high confidence in their decisions.  What they do not know are the unintended consequences.  A few examples:

1.   The Fairness in Lending Act – Be wary whenever you hear the word “fair”, or “fairness” coming from a politician.  The Fairness in Lending Act was supposed to promote home ownership of minorities, and the poor.  It is the American dream.  Lending institutions were found to grant mortgages to Caucasians at a disproportionately higher rate than to African-Americans.  Basically, the government was saying that if African-Americans represent 12% of the population, they should get 12% of the mortgages.  That they don’t is evidence of discrimination.  If that’s the case, then why didn’t we hear about Asian-Americans getting a disproportionally high mortgage approval rate?  Could it be that Asian-Americans are more credit worthy?  In reality, the banks were exercising good, safe business practice by granting mortgages on a basis of credit worthiness, i.e., the ability, and track record of being able to repay, not on a basis of race.  Under the threat of lawsuits, the government essentially forced banks to issue bad loans.  This was OK, because real estate only goes up, and the banks were just going to sell the debt to Fannie Mae, and Freddie Mac, by the way, one of whose compensated executives was literally in bed with Barney Frank, the chairman of the House Financial Services Committee.  No conflict of interest there.  The great recession is the unintended consequence caused by the Fairness in Lending Act, and the corrupt, economically incompetent House and Senate leadership under Barney Frank, and Chris Dodd.  It was either that, or the Bush tax cut (LOL)!

2.   The Minimum Wage – The Minimum Wage is supposed to help low skilled workers, right?  In practice, the minimum wage prices low skilled workers, with little experience, out of the labor market.  The unintended consequence of the minimum wage is high unemployment rates of the poor, and minority youth.  In a free market, as the economy grows, and jobs are generated, employers have to compete for available labor, driving up pay rates.  As the government interferes in the free market with artificial impositions of wage rates, the unemployment rate goes up, keeping wages low.

3.    Rent Control – Rent Control is supposed to keep the cost of rent down so that poor families can afford it.  In practice, it drives poor families out of urban areas.  Turnover of living space is reduced, because renters hold on to rent controlled properties.  There is no profit for developers to build rent controlled properties, therefore, they focus on high end, unregulated luxury housing.  San Fransisco is a poster child for the displacement of poor families due to rent control.

In spite of all of the evidence of the negative affects of the Fairness in Lending Act, Minimum Wage laws, and Rent Control laws, politicians to this day, still support giving loans to unqualified borrowers, increasing the minimum wage, and continuing rent control.  It helps that politicians, due to the average voter’s attention span being slightly greater than a gnat, are rarely held accountable.  Winston Churchill once said:

“The best argument against democracy is a five minute conversation with the average voter.”

To politicians, only intent matters, not actual results .

Stated simply, the problem with our economy is that the federal government spends more than it takes in. The Democrats would have you believe that increasing taxes on “the rich” will solve the problem. This, of course, is nonsense. It sounds good, but historically, increased taxes result in the unintended consequence of reduced tax revenue. It turns out that people really do respond to incentives. The government, in its estimates of changes in revenue based on changes in tax law, does not take this into account. If tax rates are increased, people tend to engage less in tax revenue generating activities, thus lowering tax revenue. People of wealth have the means to manipulate when and where they take income, and thus when and where taxable activities occur. The Republicans want to solve the deficit problem by cutting spending. Reducing the burden of the cost of government on the private sector is a unique, and interesting idea, if indeed any politician had the courage to actually cut the budget. You see, to a politician, a budget cut means a reduction in the rate of increase.  For example, the budget was originally going to be increased by 8%, but instead we’re only going to increase it by 4%, so to a politician, that’s a 50% budget cut. Don’t be fooled, political budget cuts are not actual reductions in the budget.

Rarely, if ever, do you hear from either side, about the single, most effective method of reducing the deficit: economic growth. Economic growth generates far more tax revenue than either tax increases (if indeed tax increases generate more tax revenue at all), or spending cuts. The question becomes how does the government generate economic growth. The answer is: the government can not directly create economic growth, unless of course you believe Nancy Pelosi when she says that unemployment benefits are the best economic stimuli there is (LMAO). Really, that is the essence of what she said, I didn’t make that up, and, to boot, the people of San Francisco keep re-electing her! Robbing Peter to pay Paul, aka “unemployment benefits”, does not create wealth, it only redistributes it. Speaking of re-electing economically incompetent representatives, what were the people of New England thinking when they kept sending Barney Frank, and Chris Dodd back to D.C.?  Nevertheless, Nancy’s argument is that people receiving unemployment benefits tend to spend it.  Sorry Nancy, paying someone to do nothing does not create wealth.  They are just redistributing money from one place to another, and perhaps taking it away from a more economically productive use.  What makes matters worse, is that increasing, or extending unemployment benefits increases unemployment rates.  Once again, we see that people respond to incentives.  Paying people not to work shockingly results in more people not working.  Kind of like farm subsidies.  Paying farmers not to grow corn, results in more farmers not growing corn.  The more you pay people not to work, the more people don’t work, the less tax revenue is collected.  This leads to another economic fallacy.

How often do we hear politicians lamenting over the loss of jobs due to technological advances?  Of the most recent, and telling ones was President Obama himself.  He was talking about how ATM machines put bank tellers out of work.  Every time I hear such nonsense, it reminds me of a story about the great economist Milton Friedman.  He was travelling in a country in Asia in the 1960’s.  Visiting a worksite where a canal was being built, he was surprised that instead of bulldozers and earth movers, the workers were equipped with only shovels.  When he asked why, a government bureaucrat explained “this is a jobs program” to which Friedman replied “oh, I thought you were trying to build a canal.  If it’s jobs you want, then you should give the workers spoons, not shovels.”  Of course, President Obama did not consider the jobs created by the companies that make and maintain ATM machines.  It is the tendency of the free market, and technological advances, to occasionally make certain jobs obsolete.  When those jobs are lost, they are lost forever, and people formerly performing those jobs become unemployed, until they find something else to do.  Miraculously, the shorter they are compensated for not working (unemployment benefits), the sooner they find alternative work.  It is often called “constructive destruction.”  Less efficient functions are sloughed off and replaced with more efficient ones, all for the benefit of the consumer.  Losing one’s job is traumatic, but I can guarantee that those people don’t just waste away.  They go back to work doing something else.    Some of them took unskilled jobs at less pay.  Some went back to school to learn a new, more useful trade.  Some started new businesses.  What was telling about the supposed leader of the free world, was his utter lack of understanding of basic economics.

At best, the government can not create wealth.  It can only create an environment that encourages the creation of wealth.  At worst, and as usual, the government quashes economic growth by passing punitive legislation that dis-incentivizes activities that create original wealth.  Increasing taxes, for example, and in particular, increasing the capital gains tax, is almost universally agreed to stifle the creation of wealth, and economic growth.  Historical data clearly shows a reduction of tax revenue when the capital gains tax is increased, and conversely an increase in tax revenue when the capital gains tax is reduced.  When more capital is left in the hands of the private sector, it does more work to expand the economy, generating more jobs, generating more tax revenue, but, alas, that wouldn’t be fair.