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.

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.

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.

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.

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?

http://www.dailyherald.com/story/?id=177986&src=109

“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.”

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.

Repairing the Illinois Republican Party's Brand Name

t should be clear to anyone that follows Illinois Politics in least that the Illinois Republican Party is in pretty bad shape when it is losing elections in districts that it should be easily winning and in which President Bush carried over 50 percent of the vote in previous years. An imprisoned Governor, a string of poor showings and candidates in statewide elections and bad decision on the part of the state leadership have left the Republican brand name in Illinois badly damage and the Republican Party should take a few ideas from marketing to help repair it’s brand name.

Product Differentiation- The Republican Party needs to present a clear well thought out alternative to the Illinois State Democrat Party, not a mushy mixed of slight differences between the Republican Candidates and the Democrat Candidates. We need to present a clear vision and set of policies based off personal freedom, small government and reduced government spending, pro-economic growth, government reform and anti-corruption. The Republican Party is at its best when it is the party of ideas and that what we need to return, not running on platform of being slightly better than the Democrats. We need to make it clear that we will not tolerate any kind of corruption on the part of Republican candidates and office holders.

Market Segmentation- The Republican Party needs to do a better job of identifying different voting blocks and then tailoring it message to address the concerns of those groups. After identifying different voter groups and their needs we Republicans need to find ways to package our message so that it appeals to these voters’ needs and problems and show them that our policies will give them a better opportunity to improve their lives. This does not mean pandering to different groups of voters as the Democrats and many Republicans do, but showing people how our policies can help them help themselves, not trying to buy them off with more government programs that do not work or help them. Like a business can have the best product in the world but if can not find a way to make it appeal to different groups of consumers they will not be able to sell it, the same goes for political parties, they can have the best set of ideas and policies in the world, but if you can not package them in a way that appeals to different groups of voters they will not be able to get their candidates elected.

Advertising- This does not just mean campaign ads during elections season, but it means getting candidates, potential candidates, and Republican volunteers out into the public and communities all of the time. Having volunteers and when ever possible, particular in local elections, candidates walking precincts so that voters can see them face to face and talk with them. Having local Republican leaders attend community events and gatherings not to push political agendas at them or troll for votes but to establish connects and ties to people with in the community that may pay off in future elections.

Rebuiliding the Illinios GOP

Jim Oberweis defeat this Saturday in an Congressional District that is overwhelming Republican and that gave President Bush 55 percent of its vote in 2004 shows how much work that the Republican Party in Illinois needs to do in order to become competitive again in the political process, in general the Illinois Republican Party needs to accept it weakness in the present and build for the future.

1. The Illinois Republican Party needs to focus on building up its farm team so that it will have a strong pool of candidates from which to recruit candidates for office in the future. This means seeking out young dynamic individuals with strong ties to their local communities and the ability to effectively communicate ideas. Along with this the Illinois Republican Party needs to work to improve it presences on University and College Campuses in the State so that every school in the State has a strong campus Republican organization and that every county, or small group of counties in less populace areas, has a strong active young Republican Organization.

2. Create a clear well though out and defined set of policies for fixing the State financial and economic problems. No more vague talk of cutting spending and keep taxes low, but specific areas that need to be target to cut, well need to show the public that we have a well thought and defined alternative to the policies of the Illinois Democrat Party and Governor Blagojevich that we can work to implement from day one. Make it clear how reducing the size of government, taxes and the regulatory burden will improve Illinois’ economy and how increase economic growth will do more to help reduce poverty and improve peoples lives than government programs.

3. Make ending Government corruption a top issues, make it clear that we understand that in the past the Illinois Republican Party has had it problems with corruption like the Democrats but that we have moved on from this and are committed to keep it out of our party and removing it from state and local government bodies and the will not tolerate any corruption in our members.

Outsourcing, Jobs and Economic Growth

In one of my previous post I discussed the issue of free trade and how a number of political candidates are blaming it for jobs loses in the United States and how the facts and economic data does not back this up. Now in this post I will tackle the other bogeymen of job lost, outsource. Much like free trade, out sourcing has been blamed by a number of people for the lose of American jobs, in particular you hear many of the leading Democrat candidates for President talking about this, Obama and Clinton and Edwards before he dropped, but once again most of their claims are unfounded. In particular you hear the claim that good paying high technology jobs in the United States are under the threat of being relocated to low-wage countries like India, while it is true that a many high tech firms in the United States have relocated some of their jobs to other countries and that during the early part of the 2000s there was a large decline in the number of high tech and IT jobs in the United States, the main reason for the decline in the number of jobs wasn’t outsource but the end of the dot com boom and the overall economic slow down. In the United States tech jobs and IT jobs are projected to be some of the fast growing job areas in the country with 30 percent growth expected out to 2012 and 7 of the 30 fast growing job field are in these areas according to the Labor Department. Secondly during this time period the United States trade surplus in the area of IT services has increased, this means that the amount of IT services that workers based in the United State sell to people and firms in other countries has increased at a faster rate than the amount of IT services that people and firms in the United States buy from people in other countries, this would include jobs “outsourced”.

Final outsourcing as helped to create new jobs in the United States, yes contrary to what you hear from many people outsourcing helps economic growth and creates new jobs, outsourcing as helped to lower input cost and increase worker productivity in the United States. Higher worker productivity means that workers will earn more and produce more reducing the cost of the goods and services that they produce and lower input cost will also help to reduce them, which in turn means that people will pay less to buy those goods and services and have more money left over to save or use to buy other goods and service. Along with these more productive workers will earn more and have more money to spend and save, all of these will add to economic and job growth in the United States. The great economic boom of the 1990s was in part made possible by the globalization of the production of physical inputs in the high tech and manufacturing industries, things like computers, steel, cars, ect, and yes this caused some job lose in the United States, though other factors where far more important, but it also helped to fuel massive economic growth that benefit every sector of American Society and the economy and that kind of growth would not have been possible with out it, and now the service industry is under going the same process of globalization and in the long run it will help to fuel increased economic growth in the United States if we allow to happen and don’t listen the scaremongers and those that have a vested interest in preventing it from happening because doing so will benefit them at the expense of the rest of society. The other thing to keep in mind is that globally the United States is one of the top, and often they top, destination of jobs outsourced from other countries.

The ignored Supply Side of the Health Care Market

Expanding healthcare coverage has once again become a major issues and their have been claims that an European style system would reduce health care cost in the United States will covering everyone. There is a number of problems with this because it only address the demand side of the health care system, ie it only affects how many people are covered, how much health care services they use and how they pay for it, it does nothing to change the supply side of the health care system or the factors on that side that help to artificial push up prices. These factors include things like the American Medical Association that help to keep the number of doctors in the American market artificial low, for example putting in affect regulations that prevent qualified doctors that received their education overseas from practicing in the United States in many circumstances, the structure of how doctors practice that in many case artificial raise cost, and the way that malpractice laws are written in a number of the states. The problem with this is that if these factors are left in place any kind of single payer health care system will continue to cause price to rise or you will have to have government enforced demand rationing for non-critical medical care, as is already present in most European Countries and Canada were people that have sole the state run health insurance have to endure long waiting periods for non-critical medical procedures. In the United States, because of the supply side factors that are different from those countries, the situation would most likely end up even worse, similar to how in Illinois it is very difficult for people to find doctors that will take Medicare/Medicaid or have to wait for long periods to see the doctor. You don’t hear anyone that support a single payer system or other universal health care systems address the supply side of the market, I suspect the reason for this is that they do not want to run the risk of having to fight the insurance companies and the AMA, Doctors, ect all at once. There are far better ways to fix the US health care system than a single payers system that is used by many other countries, but it requires that will address the factors that distort both the supply and demand side of the health care system.

trade policy and manufactoring jobs

Recently there have been a number of people that have blamed foreign trade for the decline in the number of manufacturing jobs in the United States, but this is mainly wrong, while undoubtly some manufacturing jobs have left the United States due to freer trade policies, it is not the main reason for the decline in manufacturing jobs. The main reason is the increasing productivity of the American work force in general and in the manufacturing industries in particular and improved production process and that have allowed more industrial output to be produced with fewer workers and inputs, to be exact between 1980-2003 manufacturing outputs in the United States has increased by 93 percent. Productivity has been the main reason for this, manufacturing productivity has grown at almost twice the rate of the average for non-farm business, but demand for these products have grown at a far slower rate meaning that it takes fewer workers to met demand and that has been the main reason for the falling percentage of workers in employed in the manufacturing industry as a percentage of overall employment and as percentage of GDP.

Trade restrictions would only harm the American economy in the long run, while it would probably protect some jobs, the cost to the larger economy would be greater than the “value” of those jobs protected. The reason for this is that protectionist trade policies create distortions in the larger economy as companies and consumers are no longer able to buy from the lowest cost producer, they end up paying more for the products they buy from the protected industry and this in turn effects the decision they make about buying goods and services from non-protected industries. For example take the automobile industry, it buys a number of components parts for it product from other countries because it cheaper, if they were required to buy it from domestic producers that would charge a higher price, this higher price would be end up being included in the final price of their product, the car, truck, ect that they produce. This will have a couple effects on the economy, one the higher car prices will lead to fewer cars being sold, which in turn will reduce the revenues and profit earn by the car company and this will lead to them either lay off workers, higher fewer workers in the future or paying lower wages, or some combination of the three. The second effect comes from people that do still buy cars having to pay more for each car they buy, which in turn will leave them less to spend on other goods and services, this means that non-protected industries will see their revenues and profits fall, which in turn will lead them to lay off workers, higher fewer works in the future or pay lower wages. These effects are the reason that protectionist trade policies will end up costing the economy more than the “value” of the jobs protected.

For that matter there is little reason to worry about a the American economy running out of good paying jobs, since the 1980s the number of high paying jobs in management and in specialized professional jobs has roughly double, growing at a rate that is far higher than the rate of population growth, and the percentage of the total jobs in economy made up this has increased from 23% to 30%, and 9 million jobs in this area are expected to be added by 2012.

The people that are calling for trade restriction do so for a number of reason, many of them because they are misinformed, other because they are jobs that have been lost for one of the above reason and are looking for some to blame, but many of people that are calling for protectist trade policies do so because they stand to benefit economically at the cost of the larger economy and most of the public.

short term stimulus, saving and long term economic growth

On the news I have heard a lot of economic analyst talk about how it is good for the individual person if he saves, but bad for the economy if everyone saves because it reduces demand for goods and services, or in economic terms consumption, and hurts economic growth and despite how wide spread you hear this and how it is repeat by many Keynesian Economist it is wrong for the most part. While it is true that reduce the amount of goods and service people buy in the present and can slow economic growth in the short run, in the long run it will usual raise economic, expect in the case if you had people doing an extreme amount of saving, i.e. like over a 25% of their income but the saving rates is not any where near that in the United States so it doesn’t matter or if you had them saving by hording money under a mattress or something similarly unlikely. Higher saving rates increase the amount of funds that are available for investment and higher rates of investment means stronger economic growth in the future. An increase in investment means that there will be more capital per worker in the economy, I am using the word capital in the most broad based sense that an economist would use it, so that it could refer to anything from more a business opening a new branch or factor, buying better equipment, investing in new technology, increasing the amount of training that it gives each worker, ect, but what all of this translates to is that on average workers in the economy become more productive and as productivity increase the amount of the goods and service that each person produces rise and the economy grows fasters. Also more productive workers earn higher wages which allows them to both save more and buy more goods and service increasing economic growth even more. Along with that the return that people earn on their investment will allow them to consume more in the future, which in turn helps to raise future economic growth.

Instead of short term stimulus plans that encourage people to spend more the Federal Government should, along with control spending and taxes, be looking at ways to encourage people to save more. Ways that they could do this would be to increase the amount of money that people that put into investment tax shelters like IRA, both traditional and Roth, 401Ks and reducing or eliminating the taxes on capital gains and dividends, all of which would increase the returns that people could expect to receive on their investment, since it would decrease the amount of money they would have to pay to the government in taxes off the money they earned on their investments and higher rates or return serve to encourage people to invest. A long with this the Government should seriously look and debate the idea of replacing Social Security retirement benefits with private accounts for younger workers.

Super-Tuesday

The results from Super Tuesday have given us answers on one side of the race and no answers on the other. On the Republican side the race is over with McCain now almost certain to be the nominee, particular with Romney now out of the race and the Democrat side the race is still neck and neck. I would expect that if the Democrat race turns into a long drawn out bitter fight that ends closely, that it may be hard for the Democrat to completely reconcile before the general election and that could hurt them, particularly if McCain can unite the Republican party and use the down time to replenish and build up his war chest.

The most interesting things on the Republican side was how well that Huckabee did, it seems that he brand of populist social-conservatism appeals to fair number of people, particular in the South and some parts of the Mid-West. Which make sense since many of these areas were the hot bed areas of past populist movements. The other thing that may be of interest is if this is the start of new movement with in the Republican Party. I for one hope not because populism cares with bad economic policies.

Jim McConoughey for Congress and the economy

At the start of this election cycle I was supporting Aaron Schock for US Congress from the Illinois 18th District, but after the way he handled a number of things and more importantly after talking with Jim McConoughey one on one I came to the conclusion that he is the best choice. He has a strong grasp on economics and economic policy which something that we need more of in Congress and he has the skills to be a strong leader. Schock might still have a bright future in front of him, but today should be belong to McConoughey and I hope everyone in the 18th district that reads this will vote him on Tuesday Feb. 5th

On the subject of the economy, there has been a lot of fear mongering in the media and for the most part it is wrong. Yes the financial markets have been very volatile the last month or so and that has been due to a number of things including the sub-prime problem, but a lot of it is due to the bad handling of the situation by the Federal Reserve System. The Federal Reserve System has not handled this well particularly with their surprise over night cut in the interest rates a few weeks ago, regardless of whether or not it was need, the Fed went about it in away that was going to cause problems in financial markets. Stock values are based by in large off expected future returns which in turn those expectations are largely based off what people thing the economy is going to do in the future, and a surprise closed door decision to cut interest rates like send a single that we enter a major economic downturn, even if we arent, which is the case this time.

The damage caused by the sub-prime problems to the large economy has been relative small and over time the economy will work the problems out relatively quickly. The bigger threat is the Fed will continue to follow a bad monetary policy and Washington will use this as an excuse to increase spending, particularly deficit spending, and increase the rate of inflation with out producing any economic or job growth, stagflation, and to under take an number of policies that will not have any real long term effect, tax rebates, while not fixing the real problems of the government that have harmed the economy, an inefficient tax system, government spending that is to high and continued deficit spending, doing this will go a lot father to help the economy.

The Problems with Short Term Stimulus Packages

Recently there has been a lot of talk about a short term stimulus plan to help the economy, while this goal might be noble, the problem with it is that there only a very limited about of effect that the short term stimulus package can have on the economy. A short term stimulus policy is based off the idea is that if you give people or business a temporary payment, tax rebate, tax cut or investment tax credit, that while spend or invest all of it or at least the vast majority of it. The problem is that this rarely happens, the evidence from most of the economic literature shows that this does not happen, most people do not change there spending decision based off short term changes in there income, they are more focused on long term changes and outlook for their income. Business are even less likely to base investment decision off of short term tax credits, as the evidence from the history of the investment tax credit that had little effect on business investment because of there short term nature. The problem with statistic like those that CNN had today that showed that consumer spent 2/3 of there 2001 tax rebate is that it only looks at whether or not people spent the “check”, not if they increased there overall spending, in many case people were going to spend that same amount any way, they just spent it earlier and their overall spending did not increase.

I can understand the political reasons behind the short term stimulus package, no one in government wants to look they are not trying to help, but if they must pass this stimulus package, afterward they need to move on to the long term government issues that are harming our economy, over spending, budget deficit year after year, bad government regulation and the problem with the tax system.

The Problems with Short Term Stimulus Packages

Recently there has been a lot of talk about a short term stimulus plan to help the economy, while this goal might be noble, the problem with it is that there only a very limited about of effect that the short term stimulus package can have on the economy. A short term stimulus policy is based off the idea is that if you give people or business a temporary payment, tax rebate, tax cut or investment tax credit, that while spend or invest all of it or at least the vast majority of it. The problem is that this rarely happens, the evidence from most of the economic literature shows that this does not happen, most people do not change there spending decision based off short term changes in there income, they are more focused on long term changes and outlook for their income. Business are even less likely to base investment decision off of short term tax credits, as the evidence from the history of the investment tax credit that had little effect on business investment because of there short term nature. The problem with statistic like those that CNN had today that showed that consumer spent 2/3 of there 2001 tax rebate is that it only looks at whether or not people spent the “check”, not if they increased there overall spending, in many case people were going to spend that same amount any way, they just spent it earlier and their overall spending did not increase.

I can understand the political reasons behind the short term stimulus package, no one in government wants to look they are not trying to help, but if they must pass this stimulus package, afterward they need to move on to the long term government issues that are harming our economy, over spending, budget deficit year after year, bad government regulation and the problem with the tax system.

The Economy

Today Ben Bernanke called for Congress to intact a fiscal stimulus plan, this is in line with traditional Keynesian programs to “correct” economic downturns and in theory it sounds good, but in practice they rarely work out as well as they should. The first reason that it will probably not have much effect is the size of the package, 150 billion dollars, while that sounds like a lot of money one has to remember that the total size of the United State economy is around 13 trillion dollars, so this package would only be the equal to slightly more than 1.1 percent of the US economy. The next problem is that the package calls for tax rebates; a tax rebate is when the government gives a person an advance on future tax refunds, it’s not a decrease in tax rates. In Keynesian economic this short term increase in people wealth will cause them to spend more and increase economic activity, the problem with this that people are not stupid and they realize that they will have to pay back this tax rebate or it will be taken out of there future tax refunds, so they realize that they have not had a real increase in there income and they do not increase there spending. Empirical evidence from President Bush earlier 300 tax rebate, in 2001, and from when the first President Bush reduce tax withholding to try and encourage spending, show that a large portion of the American public did not increase there spending any in response to short term tax rebates or reduction in tax with holding that were not accompanied by real cuts in the tax rates. Along with this the Fed should quite cutting interest rates, interest rates in the United State are already quite low and there already some evidence of rising inflation. On the plus Bernanke called to have the earlier Bush tax cuts made permanent.

Instead of short term fiscal stimulus package, the Government should be working on correct the action that it has made that has harmed the United States’ economy. First the United States Congress and the President needs to bring its spending under control and balance the budget, reducing the deficit and in the long term keeping the debt under control. Secondly by keeping spending under control, the Government should then move on to keeping taxes low and improving the country’s infrastructure. Doing these in the long run would do far more to improve the US economy and the lives of the common person than short term stimulus package. The United States needs to move beyond the failed Keynesian policies of the past.

Capital Projects

This is my first post of the New Year and much over due. Another year has gone by with out the Illinois State General Assembly approving a Capital Improvement program for the State of Illinois. While the problems with the Chicago area mass transit system, which was largely caused by mismanagement on the part of the officials, appointed to run it, the poor state of Illinois capital infrastructure has gotten less attention. Keeping up and improvement of the State’s Capital Infrastructure is one of the most important things that the state can do to promote economic growth. A good capital infrastructure program would increase the quality of the transportation network in the state and its schools. The improved transportation network in Illinois would make it easier and less expensive to ship goods with in Illinois and to ship goods into and out of Illinois making Illinois a more attractive place for business to locate. Illinois declining capital infrastructure has already cost the state a thousands of jobs and prevented some companies for locating here, including at least one major Japanese car company.