Monday, February 2, 2009

Trade Protectionism and Economic Welfar

Almost 79 years ago in the face of another economic down turn the United States government passed the Smoot-Hawley Tariff Act that greatly increased the tariffs on over 20,000 imported goods. As result of this act a number of other countries adopted tariff laws and trade restrictions that greatly reduced world trade, helped to worsen the economic down turn that would become the Great Depression, and was one the causes of World War 2.
Now that we are in the middle of another economic downturn we should not repeat the same mistake of putting special interest groups ahead the general public. As in 1930, protectionist trade policies and trade restriction will only worsen our current economic problems. Tariff laws and trade restriction only benefit the businesses and industries that are protected while placing an added cost on everyone and everything else in the economy. Higher tariffs would raise the cost of many goods and services in the United States placing an additional hidden tax on the public that will fall the heaviest on the poor and middle class. Since consumer will have to pay more for imported goods, or goods that were previously imported, the real buying power of their wages will fall and they while have less money to spend on other goods and services reducing demand in other industries too. Since many American businesses use a mixture of imported and domestic inputs to produce their products and an increase in tariffs or trade restriction will raise their costs of doing business and probably raise the prices of the products that they sell adding to burden placed on the larger economy. For example the US steel industry has been given trade protection a number of times and this measure ended up harming a number of other domestic businesses, for example the auto industries, by raising the cost of their inputs. So the cost of the protectionist trade policies cascade through out the economy raising cost and reduce economic activity across the board. For this reason the added economy value of the jobs “saved” by any tariff and/or trade protectionist policies are always smaller than the total cost of the tariff and/or trade protectionist measures to the entire economy. In the middle of an economic downturn do we want to place an added burden on the consumer that will fall mainly on the poor and the middle class ?

Friday, December 12, 2008

The Auto Industry Bail out, Politics and making the hard choice

In politics a lot of times politicians make the wrong choose because the right choice is the hard, this is the story of the auto bail bill. The easy decision for most politicians is to support the bail out bill and pretend that they are saving an American industry. At the moment there are 15 car companies that have manufacturing plants based in the United States, the big 3 and 12 international companies. While the international companies that have plants located in the United States employee fewer workers directly than the big 3, they produce more cars, their stock is owned by millions of Americans and they do a lot of research and design work in their American base locations. Like the big three they add a number of good paying high skilled jobs and add billions of dollars of value to the United States economy and unlike the Big 3 they are not asking for bail out.
These companies are doing better than the Big 3 because of better management, yes the Detroit has a number of legacy cost but many other business in other industries face similar cost but they either changed their benefit system or they died. Detroit has refused to change in part because of past assistance from the government and the belief that if they faced a major crisis the government would bail them out, and it seems that they are right. The big 3 have also made a number of bad decisions that have harmed them they allowed themselves to fall behind the international car companies in a number of different areas and they failed to adapt with changes in consumer needs and tastes in both the domestic and international market. Detroit has promised that they will change if they get the bail out but there is no reason to believe them so far they have resisted change and have refused to admit that they are not still competing in a market place that they could dominate like in the past. Will the government force them to make the changes that need to be made? The odds are probably not, any government forced restructuring of the Big 3 is likely to be influenced as much by politics as by economic needs. The changes that are made will probably be a poor mixture of economically need changes, political motivated changes that are not beneficial and could make the problem worse in the long run and many changes that are need will likely not be made because they are politically difficult. At best the bail out will just stave off the problems that the Big 3 are facing not fix them and sooner or later they will face another crisis.
What will happen if the Auto Industry in the United State collapse and will 2 million people lose there job like the Big 3 and the UAW claim? The mostly likely answer is no they wont, the international companies will certainly not fail and 2 million people will not lose their jobs. One or more of the companies will likely enter bankruptcy, Ford might have enough reserve to avoid bankruptcy, but GM is likely to enter bankruptcy. People need to keep in mind that corporate bankruptcy does not necessarily mean the company will cease to exist but that the company will under go court restructuring. This means that the company will have an opportunity to renegotiate the terms of the debts that they owe, labor contracts and restructure and streamline their operations. Many companies have emerge far stronger, more competitive and better able to face a changing market place after going through bankruptcy. Yes it will be unpleasant for the company, its shareholder, workers and debt holders but it has a better chance of producing an out come that will fix the long term problems faced by the Big 3.
Even if the one or more the Big 3 cease to exist does that mean the auto industry in the United States will collapse? No, not at all the American consumer and economy will still demand a similar number of cars a year, with or with out the Big 3, more cars that can be produced by the current number of plants owned by international car companies. Something will have to happen to increase the supply of cars to the United States market, imports could increase but imported cars are at disadvantage compares to similar cars produce in country hence the reason that many international producers have located in the United States. In the long run you will see international producers expand their productions with in the United States and new companies might well enter the market. In long run many of the plants, workers and production equipment of any Big 3 company that fails might well end up being employed again by a different producer.
In the long run for the American economy the best thing is for the government to make the hard choice and not bail out the Big 3 and let the market run it course. It might be hard at first but in the long run it will strength both the American Auto industry and the economy.

Wednesday, November 5, 2008

To my fellow Republicans

Quite frankly last night we got what we deserved President Bush in office had turned away from almost everyone of the values of that we as Republican are suppose to have. In 1994 the Republican party became the majority party in both Houses of Congress for first time in decades by running on a platform of changing and reforming Washington and reducing the size of government and a some head was made on this but the sad thing is that most of the head way was made when President Clinton was in office and their was a split control of the government. When President Bush came into office and for long periods of his term the GOP had control over one or both Houses of Congress we had the real change to make some major changes and vastly improve and shrink the size of government, but none of this happen. Instead we became the big spenders who ran up the running up the deficit, throwing out pay as you go rules, adding new entitlement programs, increasing agricultural subsidies and other forms of government interventions in the markets. Many social conservatives instead of wanting to reduce the government roles in people's private life and empower and strength families came to see government power as a way to push their values and fiscal conservatives seemingly became almost totally silent. We had a chance to make a number of major changes that could of set America on a better stronger course, reform social security, reform and simplify the tax system, reduce government spending and the size of government, pay down the debt, expanding free trade, reforming education and instead we let that opportunity. We deserved the defeat that was inflicted on last night, hopefully we will learn our lessons from it.

Saturday, June 14, 2008

A Republic If You Can Keep It

When he was asked about what kind of government the Constitutional Convention had produced, Ben Franklin was said to have replied a Republic if you can keep it. The key word that we should take note of in that statement is if you can keep it, Franklin new that a Republic is a difficult form of government to keep because it requires it citizens to be well informed and involved in the political process in order for a republican government to function properly. Too many people in the United States do not do their duty as citizens, they don’t stay up to date on the issues facing the country, they don’t stay informed and they don’t vote. They make excuse for this behavior by saying that one person can’t make a difference, that they don’t have the time, that it doesn’t affect them, but when the average person chooses to divorce themselves from the political process this special interest groups to gain more and more influence and this is one of the reason why it seems at times that government policies serve the interest of a relatively small set of interest groups not the general public.

I know that in Illinois there are many people that are share the set of core beliefs of the Republican Liberty Caucus that are not involved in the political process because they are turned off by the candidates offered by the Republican party right now or because of actions of the Illinois GOP. If anyone reading this is one of those people I hope that you will take a second to consider that instead of waiting and hoping for the Illinois GOP to changes or for some candidate to come around and inspire you that you should start working to things. Instead of waiting for some one else to inspire you to go out and get involved in the political process you should inspire yourself to do so and work to inspire other similar minded people to get involved. Political work takes sacrifice, it requires people to give up their time, time that they could be spend with family, friend, ect, and some times it requires us to give of our money too but I truly believe this sacrifice is more than worth it if it helps to produce a better nation for all of us. Once again if you are reading this and you are one of those people who is sitting on the political side line I would ask you to read over the positions of the Republican Liberty Caucus and take some time to think about them and if they make sense to you and seem like good government policy, then please join us and help to build a better us to build a better Illinois GOP, a better Illinois and better nation.

Thursday, May 15, 2008

More Farm Subsidies that Rip of the Tax Payer

Yesterday the U.S. House passed a 290 billion dollar farm bill that will continue the long tradition of farm bills that benefit farmers at the expense of the vast majority of the tax paying public. The bill includes 43 billion dollars in subsidies for crops like rice, wheat, cotton, corn, soybeans and others. Agricultural subsidies do not benefit the general public and only benefit the people who receive the subsidies everyone else ends up paying more through taxes. Agricultural subsidies also create distortions in the market so that the prices that people pay for farm products at the stores no longer represent the true price, as they are paying a hidden cost and farm production no long represent what production would be in the free market. Agricultural subsidies lead farmers to over produced farm products which keep store prices artificial low, but not the true prices since people still pay them through taxes, the only difference is that they no longer have the ability to easily base their purchasing decision off the true prices. Also over production caused by government subsidies leads to the over the use of farm land, fertilizer and pesticides/herbicides, which harms the environment.
Along with that the bill would encourage the government to buy "surplus" sugar and sell it to ethanol producers. The problem with this is that if their is "surplus" sugar on the market, it means that sugar farmers are producing more sugar than can be sold on the market for the given price and prices should fall to reflect the other production, or production should fall to bring the market into balance and with out government intervention that is what would happen. With the government buying up "surplus", sugar prices will stay artificially high meaning that the public will be paying more for sugar and products that contain sugar than they would with out government intervention.
The bill also contains 23 billion dollars in crop insurance, while crop insurance is a good thing for farmers, it is something they should pay for themselves the same way that most, if not all other businesses, pay for their own insurance. Their is no reason that farm product insurance can not be handled by the commercial insurance market or risk managed using the future market, yes it would cost farmers more but it is a cost of business that is faced by most if not all other businessmen and should be paid for by the tax payers.

Wednesday, April 23, 2008

WHY the ILGOP needs a change in Leadership

Today in the Daily Herald there was article that shows the exact reason that the Illinois GOP needs a major overhaul in its leadership. There are reports that Governor Blagojevich enlisted the add of Bob Kjellander, a major insider in the Illinois Republican party, to attempt remove Patrick Fitzgerald from his job as US Attorney. Is this what an Illinois Republican Party leader should be doing? Possible working with a Governor who office is under investigation by the US Attornery to try and remove him the US Attornery from Office?

“As federal investigators closed in, Gov. Rod Blagojevich insiders were angling with Bush administration architect Karl Rove to get U.S. Attorney Patrick Fitzgerald kicked out of office, according to disclosures made in federal court.

The far-reaching accusations came from the U.S. attorney’s office in Chicago as part of the corruption trial against Blagojevich fundraiser and confidant Antoin “Tony” Rezko.

Federal prosecutors said in court that co-schemer Steven Loren was ready to testify he was told Illinois Republican insider Bob Kjellander was working to get Fitzgerald removed.

Powerbroker Bill Cellini “said it was Bob Kjellander’s job to take care of the U.S. Attorney,” Assistant U.S. Attorney Carrie Hamilton said in court late Tuesday, in reading Loren’s earlier grand jury testimony.

The statement was not further explained Tuesday, but in court this morning Hamilton told U.S. District Judge Amy St. Eve that she expected Rezko business partner Ali Ata, who is cooperating with authorities, to testify Rezko told him the same thing in 2004.

“Mr. Kjellander is working with Mr. Rove to have Mr. Fitzgerald removed so someone else can come in” and end the investigation of state corruption, Hamilton said in summarizing Ata’s expected testimony about what Rezko said.

Kjellander, an Illinois lobbyist, is a national Republican player who recently served as treasurer to the Republican National Committee. He is known friends with Rove and helped orchestrate George Bush’s Midwest campaigns.

Fitzgerald has been on the Bush administration’s radar screen since at least 2003, when he took on the investigation of the Valerie Plame leak in which White House officials were accused of illegally disclosing her CIA identity in retribution for her husband’s opposition to the Iraq war.

The investigation ultimately ended in the conviction of Dick Cheney aide Scooter Libby on perjury charges.

In fact, it was revealed last year the Bush administration ranked Fitzgerald one of the nation’s U.S. Attorneys who did “not distinguish themselves” in 2005, at the same time he was heading up the Plame case and prosecuting former Republican Gov. George Ryan on corruption charges.

Those rankings later evolved into the notable ousting of eight U.S. attorneys in 2006, a move that was widely criticized at the time as being politically motivated.

Traditionally, presidents have been expected to remove politics from the choice of U.S. Attorneys so as not to influence the prosecution or investigations of political figures across the country.

Kjellander has not been charged with any wrongdoing. He is, however, allegedly connected to the overall scheme in which Rezko is accused of shaking down state investors for bribes and campaign contributions.

Kjellander received about $800,000 in questioned “finder’s fees” tied to a bond deal under Blagojevich.

In court today, St. Eve ultimately ruled Loren couldn’t testify about his conversation with Cellini in 2004 because it was unrelated to Rezko. However, she said that does not rule out the later testimony of Ata that directly ties Rezko to the alleged incident.”

Friday, March 28, 2008

Presidental Candidates Economic Proposals

The last week or so the Democrat Presidential Candidates have made a number of statements about the economy and a few policy proposals, today I am going to take a little bit of time to examine some of them.

Senator Obama called for reworking regulatory frame work and “boosting” the economy with a 30 billion stimulus package and a long with that he made a few more proposals that we will look at in a moment. As anyone that reads my blog knows, stimulus package like this will have no little or no real effect on the economy, one reason being the size, 30 billion dollars sounds like a lot but it terms of size it less than one percent of the US Gross Domestic Product (GDP), GDP being the best measure of the size of a country’s economy. The second reason is those short term stimulus packages do not work because people and business in the economy know that they are short term and it does not change their long term spending and investment decisions, for a more in depth look at this, see my previous entries on the Presidents short term stimulus bills. Now lets look at some of his more specific proposals:

· Institutions that borrow from the government must be subject to federal oversight and supervision.

For the most part that is already the case; there is nothing new here and nothing that will prevent future economic down turns.

· Regulations for those institutions need to be updated

This is a good point and in many cases the regulation need to be reduced, but some how I suspect that he might be proposing new regulations. The problems with many government regulations, particularly ones on the financial markets, are that they are rarely efficient and often have a negative effect on the large economy and investors large and small. They often encourage the creation of new financial products to get around existing regulations; the derivative market in part was created because of this. Regulators and politicians in particular often have a poor understanding of new financial instruments and the cost and benefits that they bring to the economy, once again derivatives are a great example of this they often blasted as adding to the risk the of the financial markets or destabilizing them by politicians and some regulators, when in reality there is zero evidence that have made the market any riskier in the long or short run and they actually have a powerfully ability to allow people to protect themselves from risk by allowing investors, institutions, business and even farmers, who often used derivatives based off of farm products, to reduce their exposure to risk by diversifying or trading it away.

· The framework for overlapping and competing regulatory agencies needs to be streamlined

This is a good idea particularly if accompanies increased deregulation for many industries.

· Institutions need to be regulated "for what they do, not what they are"

This once again is a good idea

· A crackdown on trading activity that manipulates the markets is necessary

This is a stupid and impossible idea, for the first part there is a little evidence that anyone trading in the way, or even has the ability, to trade in a way that would manipulate the financial markets on a large scale. Yes you have insider trading that could manipulate the prices of a single stock or small group of stocks, but in the case of the large financial markets, you are talking about markets that are so large and diverse with some many people participating in it, that would be all but impossible for trading activities to manipulate the larger market.

The second problem is that even if such activities did exist, it would be all but impossible to identify these activities and it would problem end up with regulators or politicians going after legimate trading activities for political reasons, for example like when SEC regulators and some members of Congress attempted to heavy restrict the derivatives markets largely at the behest of Stock Exchanges and large brokerages, who profits were threatened by the derivative markets allowing people to trade stocks indirectly and get around the commissions that they charged. Had they succeeded the large economy and investors, particularly small ones, would have suffered as they would had to pay more to trade stocks, bonds and other financial products and the decline in the transactions cost associated with trading in financial markets that we saw during the 1990s and 2000s would probably not have happened.

· A process that identifies systemic risks to the financial system is needed

First here is a definition of Systemic risk - is the market risk or the risk that cannot be diversified away, as opposed to "idiosyncratic risk", which is specific to individual stocks. It refers to the movements of the whole economy. Even if we have a perfectly diversified portfolio there is some risk that we cannot avoid and this is the systematic risk

Systemic risk be it nature is very difficult if not impossible to correctly identify in far in advance and for these reason it has the ability to affect the financial markets, if it were easy to identify then investors would be able to effectively plan for it in most cases, as would business and the risk would be reduced or eliminated. For the government to be able to effectively identify systemic risks to the financial system, and for that matter the larger economy, you would have to assume that they have access to better information about future changes in the economy than the markets do, which there is little or no evidence for. This seems to go back to the old Keynesian ideas from the 1930s-1970s, that the government has the ability to manage the economy and prevent economic downturns, and this idea proved to be a failure and ended in the stagflation and economic downturn of the 1970s that continued to have negative effects into the 1980s. The more rapidly changing economy of the present and the better understanding of the markets, public and business of how government policy affects the larger economy makes the ability of the government to micromanage the economy even less likely now.