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.

Monday, March 24, 2008

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.

Sunday, March 9, 2008

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.

Saturday, March 1, 2008

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.