The Way it Should be

2007-04-23T19:13:00.000-04:00

I Soften My Disagreement with an Increased Pigou Carbon Tax

In an earlier post, I criticized Harvard economist Dr. Greg Mankiw for his support of what is known as a Pigou tax on carbon emission producing products. After careful consideration and much research on the issue, I have softened my argument against Dr. Mankiw's proposal.

The tax would increase the tax on gasoline thereby raising price and reducing the quantity demanded. This would lower greenhouse emissions and presumably be good for the environment. My initial argument was based on the fact that taxes are almost always bad. Although I still believe that in most cases, this particular issue could be an exception. Let me go ahead and state that I am still not sold on the idea, but as I am about to explain, it may be the lesser of evils. Judging by the current political climate, there will almost certainly be future legislation passed to curb environmentally harmful activities. The solution, if left up to politicians, will almost certainly be a poor one. This increased sales tax on gasoline is at least fair and predictable. No one would be forced to pay it, and individuals would be taxed based on their contribution to pollution.

What has me rethinking my position on this issue is that Dr. Mankiw has proposed increasing this tax while lowering the income tax. That is exciting. By lowering the income tax, the government is keeping more capital in the hands of the most productive members of society. This is good for everyone since capital is the fuel of economic growth.

Now let me explain why I am still not completely sold on this plan. By increasing the gas tax, the government is encouraging the use of frustrating public transportation, car pooling, or simply not traveling at all. These make us less mobile. I believe mobility is a key behind productivity, since it not only makes us more time-efficient travelers but also keeps us happier since we are autonomous and don't have to deal with the headaches of group travel. Also, I am sure there are unintended consequences that have yet to be conjured.

Alas, if Congress feels it must do something, I support experimenting with raising the gas tax and lowering the income tax. The economic benefit may actually be positive since adding this tax may actually make our tax system more fair and more efficiently allocate resources within our economy.

2007-03-01T21:33:00.000-05:00

One of Those Things Every 0-40 Yr. Old Should Know

So, the US Comptroller General says Medicare is going to bankrupt the country. Duh. Isn't that what we have been saying for a couple of decades now? Want to know the reason it is going to bankrupt us? Because the government is involved in the market. Do you actually believe the pharmaceuticals, hospitals, and other health-related companies have any incentive to keep prices low when their payments come from a third party that has a gargantuan tax base? Not when the big, bad government is disrupting and distorting the market. I would like to take this opportunity to thank the current legislators for forever putting this obvious and onerous burden onto me and my lineage.

2006-11-15T21:21:00.000-05:00

Maybe the New Democrats Are Not Different

I have previously stated that I think the change of control in Congress is not a bad thing, but in some ways actually good. This is because many of the new Dems appeared throughout the campaign to be as conservative, and sometimes more so, than their Republican opponents. I must hope Senator-Elect Jim Webb's Wall Street Journal op-ed today does not reflect the consensus opinion of the newbies.

His ideas for wealth redistribution are flawed and will have the ultimate effect of strangling the economy through tax increases and economic protectionism and isolationism. These are proven and obvious to restrict economic growth. Let's all hope the rest of the new guys aren't as nearsighted and economically ignorant.

2006-11-08T22:07:00.000-05:00

A Resounding Conservative Loss? I Don't Think So.

The recent Democratic victory may cause many conservatives to question the power and momentum of the conservative movement. I would like to tell my fellow right-wing ideologues to just calm down for a minute and analyze the situation from a longer term point of view. If you just look at the election as Republicans versus Democrats then you will find reason to worry since it was a strong win by the Democrats. However, looking at the election in the way that matters, in an ideological sense, then you see conservatives are still in an excellent position. The Dems that won Congressional seats are not your LBJ Democrats. They are fiscal and social moderates, some even conservative. They were able to win votes as Dems from a voter backlash against the President and the GOP, and many were excellent candidates that gained the votes of many right-of-center voters. This is part of a larger mainstream movement toward the ideological right. These new Congressmen tend to be pro-life, anti-gun control, and pro-economic growth. I do not believe they will allow taxes to be raised, nor do I believe they will become economic isolationist and protectionists. They will do what is right. I believe they will cut back on federal spending and may even find a way to cut out the pork barrel spending that has plagued the GOP the last half decade. The positive aspect of this is many of the Republicans they replaced had not done many of these things with a one party controlled government. This is democracy at its best. The incumbents do not get the job done, the constituents are given someone who they believe will, and he gets elected.

There are however a couple of troublesome areas that the Republicans will have to guard against. The first is the new Congressional leadership. They are as liberal as they come. They would love nothing more than to move toward socialism by boosting entitlements, raising taxes, and increasing the size of government(with the exception of Defense and Homeland Security, of course). What we conservatives have to hope for is the new blue dog Dems will stand by their principles and constituents and not follow the Nancy Pelosis, Harry Reids, and Charlie Rangels down that road. I do not believe these liberal leaders realize just how hard a task it will be to get their leftist agendas through Congress with this large number of moderates and conservatives in the Houses. In the long run, this will hurt those at the far left and help those of us on the right. Another strong concern has to be toward national defense. These newly elected Congressmen ran on a change of course in the War on Terror. If they do in fact insist on a change once they get to Washington, I hope it is not one of retreat and forfeiture. I hope their national pride and sensibility tells them we must stay and finish what we have started. I hope they realize running away will do nothing more than empower terrorists and reinforce Anti-Americanism around the globe. We need to stay and prove to the world that when we make our mind up on something, we follow through and make sure the end result is to our liking. Another disappointment in the Dem victory is that it looks as if entitlement reform is off the table for awhile. My generation will continue to pay into the entitlement system what we will surely not get out. Maybe there are some of those blue dog Dems who have the backbone to take it up, but I am not holding my breath.

While Tuesday November 7, 2006 has proven to have been a red letter day for Democrats, I urge you, fellow conservatives, to not get upset and do not become angry at the gloating of your liberal peers. For conservatism has prevailed in this election and that is what really matters.

2006-11-01T22:21:00.000-05:00

Why is New York Losing Business?

For the past few years New York City has been losing market share in the global financial market. Many simply blame regulatory burden caused by Sarbannes-Oxley and other government actions and move on. I agree Sarbannes-Oxley, especially Section 404, needs to be revisited as does most legislation Congress passes, but I will not concede that law is solely responsible. There are many other factors that I feel are playing a much larger role in companies taking their financial needs out of the United States.

The first and most obvious explanation deals with globalization. Reductions in trade barriers, advances in technology, and the liberalization of free markets around the world throughout the past twenty-five years has created a global economy where wealth and knowledge reside in non-Western countries. There are now pools of capital available in every corner of the world. All else equal, companies will prefer to do business closer to home than in some far away place. There is a sense of regional pride and comfort created by doing business with people that understand not only your business but also your culture.

The next reason may have to do with the relative newness of the markets. These newly formed markets do not have the number of listings or investors as is seen in the US markets. With less companies to invest in, the participants in that market will invest more money into the available companies. This could artificially keep stock prices higher than what they should be, and assign a greater market value to the companies. This may go against efficient market theories, but with globalization comes much more aggregate information. I predict US-listed companies get much more attention than those listed on newly formed exchanges. Therefore the market for ideas and knowledge among the investors is smaller and less efficient causing less efficient asset markets and possibly faulty valuation in these smaller markets. This would attract companies who would wish to avoid getting lost in the mix in larger markets.

Ultimately, I believe New York is losing ground in the finance industry because of the banking fees it charges. New York City based bankers and firms have long been the cream of the crop and charged the fees to prove it. I still believe we have the smartest people in the world working on Wall Street, but others around the world have found an opportunity to take market share. Simple as it may sound, they have lowered the price they charge and undercut Wall Street. These companies that need financial services may not get the best advice outside of traditional sources, but if they can get sufficient service at lower cost it makes good simple economic sense to take advantage. The ego of Wall Street is costing them market share. They are most likely blinded by the enormous amount of money they are still making, but in terms of market share they are, and have been, losing. As competition increases, price competition will become more fierce and Wall Street will continue to lose unless they decide to become more price competitve. When strong competition enters an industry everyone is out for one thing; market share. It is the way to outlast competition and sustain.

In conclusion, for the good of the American financial system and especially New York City, I hope the Wall Street geniouses that man the trading floors and corner offices figure it out before they are forced to play the costly and tireless game of catch up.

2006-10-20T15:32:00.000-04:00

Gas Tax Hikes a Good Idea?

Harvard Economist Gregory Mankiw opines in today's Wall Street Journal the possible benefits of substantially increasing the tax on gasoline. I am almost exclusively opposed to tax increases of any kind, but there is at least some sound logic in Mr. Mankiw's proposal. Those of us who believe in free markets and capitalism know that the high gas prices of late are not necesarily a bad thing and are determined by the market supply and demand. The benefit of high prices is an increased incentive to innovate and produce alternative products. When supply of a good or service is low and demand is high, there is opportunity for others to enter the industry and take some of the profit. This works out well for the consumer since there is now increased supply of the product, in this case gasoline or a substitute, the price decreases accordingly. Mr. Makiw proposes that a $1 increase in the gas tax would help the environment and road congestion since people would drive less, as well as the budget deficit since the government would see a windfall in tax revenues. This seems a little counterintuitive to me. If people drive less wouldn't there be less tax revenue to collect? Mr. Mankiw seems to believe there is not a direct correlation between price and demand, or rather that demand for gasoline is inelastic. I would disagree. Although inelasticity was prevalent in the recent run up in gas prices, I do not believe it is sustainable. The consumer was able to pay for the more expensive gas with the proceeds gained from the large appreciation of his home. The economy and stock market were doing well, not only providing the consumer with real money but also giving him a psychological boost that entices spending over saving. These trends are not sustainable in the long run. With high gas prices the consumer will eventually change his habits. This is why tax increases may in fact decrease emissions and road congestion, but it would also decrease government tax revenues. This tax increase/tax revenue increase policy goes against supply side economic principles that say tax increases limit economic growth and limit the tax base. This takes capital out of the hands of productive, entrepreneurial, wealth-creating individuals and businesses and puts into the less productive and inefficient government. I also discount Mr. Mankiw's claim that the "windfall" from the tax would materially help pay for the baby boomer's entitlements as wishful thinking at best. The only way to fix the looming entitlement crises is reform. I do agree with Mr. Mankiw's claim that the less oil we consume, the less money we send to the hostile regimes supplying it, and that is a good thing.

Tax increases are almost always a bad idea, even if there may be ethical reasons behind them. There are unforeseen consequences to everything and generally the market, made up of consumers, makes better decisions than government. These kind of policies tend to have the effect of disrupting efficient markets (even this one that OPEC tries to control but apparently cannot). This tax increase would be another way for the government to get into the pocket of Americans, and I think I speak for all when I say the people have had enough of intrusive government.

2006-10-18T14:39:00.000-04:00

Wal-Mart and Capitalism

The constant attacks on global retail giant Wal-Mart throughout the past couple of years have caused many to begin to believe the non-sense rhetoric being spread by those who object to way the company runs its business. The arguments and complaints most often seen and heard concern worker treatment, impact on the community and local economy, and mistreatment of entities it engages in business. I will address those individually, but I also want to highlight the oft-forgotten aggregate domestic and international impact of the company.

The biggest problem it seems has to do with the way Wal-Mart treats its employees. The talking point is that the company is wrong to minimize worker wages and benefits and this is inherently harming poor and middle class America. I have heard no legitimate arguments from Wal-Mart workers concerning their wage and benefits package. Sure every worker in every industry would prefer wage and benefit increases, but somehow Wal-Mart is able to retain workers. These workers could go elsewhere to find work, probably at pay competitive to Wal-Mart's, but they tend to stay. This is because Wal-Mart offers entry level jobs with the real opportunity to move up the corporate ladder. Where else can a high school grad find employment working for $8-10 per hour with the opportunity to move into a management position of a Fortune 500 company within a few years? A domestic unemployment rate close to its natural level shows that there have not been, and are currently not, a lack of jobs.

After Wal-Mart haters get done with that, they move on to explain how stores harm the local economy. They argue they shut down 'mom and pop stores' that are vital to the community, and the high demand for their products causes traffic flow problems around the stores. When I see this many people apply for this many jobs, I think the people of the community feel the store opening in their neighborhood may be a good thing. Second, the company comes into a town buys a large piece of land, usually away from much else, and makes a huge investments in the building of the store. This store expands the community's tax base considerably since they can now get large yearly property tax receipts from the appreciation of the land the store sits on, as well as the windfall of the sales tax receipts the company accumulates throughout the year. The stores also have proven to bring in other stores nearby due to increased traffic. This creates a commerce area of new development that didn't exist previously.

There are also individual consumer benefits that follow Wal-Mart stores. Wal-Mart offers consumers products (ones they may have access to previously and some they may not) at prices lower than other business in the area. This increases the consumer's discretionary income since they are spending less and saving more. Increases in saving increases the capital in the community giving other entreprenuers access to funds to invest in ideas that further boost the economic conditions and lift standard of living of a community. Wal-Mart may in fact drive some competition out of business, but this what happens in free markets where corporate darwinism prevails. People will say it is wrong to drive that little company that has been in operation for 50 years out of business, but it is not in the hands of the community leaders to protect the profits of a few (the small business owners). Rather, they should look out for the interests of the whole community by allowing the more efficient, effective, and price competitive Wal-Mart to come into their area and offer consumer's what they want and at lower prices. The 'mom and pop stores' will not be forced to close if their products and prices are in line with what the local consumers desire. They will close when consumers go elsewhere (Wal-Mart) to receive more selection at better prices. I'll also remention here the local economic benefits of the large job creation the store brings to the community.

You may think there would not be much else the naysayers can complain about, but you would be underestimating their diligence. The environmentalist say Wal-Mart is bad because their fleet of big-rig delivery trucks is putting harmful emissions into the air, even though Wal-Mart has proven to be a leader in implementing environmental technology to all areas of its business. Other big trucking firms do nothing to improve environmental standards, yet they receive no criticism from the environmentalist. Some business advocates say Wal-Mart is bad because they force their vendors to bend over backward to keep prices low and improve efficiencies in the supply chain. Wal-Mart does this so it can charge the lowest possible price to you and I, the consumer. These efficiency (productivity) increases are the key to improving overall standard of living through economic growth. The more efficient (productive) the individual businesses in an economy are, the more non-inflationary economic growth its people will enjoy. Isolationists will say Wal-Mart buys many of its products overseas and is costing us jobs domestically. This goes against all the laws concerning the ecnonomic benefits of global free trade that say when people trade freely, each party will become better off in the end. Once again, Wal-Mart is minimizing its cost to minimize price to the consumer. It is benefitting the masses instead of protecting a few higher priced producers at home. Union advocates say Wal-Mart is treating the attempted formation of unions illegally or unethically. Another attempt to keep costs down to benefit the general public over a few. The company is doing all of this while continuously returning profits to shareholders as it has been one of the best performing stocks in the history of the American stock market.

What the critics often leave out of their propoganda and rants is the aggregate and global benefits of Wal-Mart. Wal-Mart's low cost pressure along with its supply chain efficiency are responsible to a certain degree of suppressing inflation pressures throughout the past 25 years. They force themselves as well as the companies they do business with to constantly innovate to find ways to lower costs while maintaining quality products. Wal-Mart employs 1.3 million people, second only to the government, providing jobs for many low skilled individuals who may have trouble finding work elsewhere when economic conditions turn unfavorable, and giving those people marketable skills and the possibility of upward mobility. Globally, as John Tierney points out on the Opinion page of October 17th's New York Times, Wal-Mart's low cost strategy causes factories to be built where the labor is cheapest, often the most poor of countries. The workers are paid dramatically more than they were in their old jobs, even if it dismal by our blessed standards. You must look at this relative to the previous local conditions. So, Wal-Mart is helping to reduce worldwide poverty in the areas where conditions are the worst. Wal-Mart is also expanding its operations worldwide which will allow more people access to the large array of products at affordable prices. This will result in a sharing of ideas across cultures that will benefit Americans and foreigners alike.

Critics love to hate Wal-Mart and everything they stand for, but the company is good for the common man. Wal-Mart has revolutionized the way businesses function for the better and I hope the Wal-Mart will ignore the naysayers and continue to innovate to increase customer satisfaction. With the right managerial mindset, Wal-Mart will continue to be a shining beacon of capitalism in America and worldwide.

UPDATE: Wal-Mart expands its $4 generic drug program to 14 more states bringing deep cost savings to the customers of 1,264 stores in the US.

2006-10-13T14:32:00.000-04:00

What Alternative Universe is Bill Clinton Living In?

Former President Bill Clinton has been touring the country as of late trying to raise money and support for Democratic candidates by explaining how much better off everyone was during his term of office. He made an attempt to combat President Bush's talking points on the general political landscape at fundraiser in Las Vegas for the Senatorial campaign of Jimmy Carter's son. Mr. Clinton says many things that are just bizarre, I mean like Howard Dean bizarre. For instance,

For six years this country has been totally dominated - not by the Republican Party, this is not fair to the Republican Party - by a narrow sliver of the Republican Party, its more right-wing and its most ideological element.

I believe if that "most ideological element" of the right wing had their way things would be much different. The estate tax and the double taxation on dividends would be eliminated along with tax reductions on all levels of income (that's if a simple across-the-board flat tax would be too "radical"). Federal government spending would amount to nothing more than national security, defense, and the administration of the government itself. Entitlement programs would be reformed through private accounts on the way to being removed altogether. The Federal Register would lose most of its thickness due to new rules repealing most of the previous regulation, thus lowering the cost of doing business while increasing competition. The Department of Education would be done away with (is it constitutional anyway?) localizing the task of education. Any program currently run by the government that could be done privately would be abolished, such as road construction and maintenance and emergency management. The Administration and Congress would be given flexibility and power to protect Americans (the first and foremost role of government) no matter what. This means roving wire taps, prisoner treatment in line with the Geneva Convention, and terrorist financing search programs.

Mr. Clinton may want to reassess his views of exactly where the ideological part of the Republican Party stands. The current Administration has even admitted that they believe in something called "Compassionate Conservatism" that they have used to increase the size the government and portray a more moderate view of the Republican Party on domestic issues.

As far out as the above quotes are, this one takes the cake;

Doesn't it embarrass you that these poor people are trying to sneak over the Rio Grande River to find a living in this country and we want to stop that? But we're only too happy to turn around and say, 'Don't spend your own money on those poor illegal immigrants to give them an education and get a job in Mexico. Loan it to us.

The rational response to this statement is; of course we want to stop illegal immigrants from crossing our borders! In this day and age where Islamic fascists are trying to kill each and every one of us we need to know who is coming in. Otherwise, eventually, we end up accepting our murderers into our homes with open arms. Mr. Clinton then goes on to explain that someone, I presume he is speaking of the Mexican government, should spend their money on education and welfare instead of buying US government debt. Mexico is a sovereign democratic nation. They have free democratic elections and those leaders elected, as well as individual citizens, have the right to do whatever they wish with their money. If they can get a greater return on their investment in the US than at home, then they would be foolish to not invest. In a perfect world the Mexican people would reform their economy to increase national and personal wealth, but in the near term, Mr. Clinton is surely not the economic guru to tell the Mexican people how they should spend their money.

Mr. Clinton has been not be on a hot streak lately. He has lost his temper and attempted to embarrass Chris Wallace on television and made statements like these. Maybe he thinks his wife has a chance to win the Presidency and 2008 and overshadow his own legacy, and in reposonse he is doing everything he can to sabotage her chances. My vote is that he has just lost touch with reality. He understands the momentum and power of conservatives in a still-maturing conservative movement and is losing his mind because the populous is not in line with his liberal style of thinking anymore. Either way Mr. Clinton needs to realize that he is actually hurting the Democratic Party during an election they may win and step aside from the spotlight.

2006-10-09T17:10:00.000-04:00

My Take on the Wage Debate

There has been much said lately about the relationship between the United State's aggregate economic gains and the level of worker wages. The majority of the talk has been laced with political bias as politicians and talking head types try to pick up votes in November. The argument heard most is that the average middle class worker is getting the short end of the stick by seeing his productivity increase to historical levels, his real wage (wage minus inflation) fall, and corporate profits skyrocket. It is said this is further evidence that the Republican Party is one of the upper class and is out to exploit the poor to benefit the rich.

The productivity gains of the last five years have been unprecedented in documented history. The American worker has defied the law of diminishing returns and increased his productivity to record levels and drove corporate profits to ever-higher levels. These excess profits show up as either wage increases, business reinvestment, or a combination of the two. This is where the liberal pundits have it wrong. Businesses have taken advantage of these strong profits, an easy money policy by the Fed, and extraordinary amounts of capital sloshing around the world to invest in expanding their business. This investment has fueled the large amounts of jobs created this decade and driven the unemployment rate down to 4.7%, which many economists believe is close to the natural rate of unemployment. So, instead of business owners raising the wages of current employees, they have opted to create more jobs. Eventually, as more jobs are created the availability of labor shrinks, forcing employers to pay more to workers. Seems like a pretty good deal for the lower and middle classes when more lower level jobs are being created, and eventually this job creation pushes up wages.

Now, I am not at all conceding or using the above to say I agree that workers are not making more money. When looking at wages, which is the figure that best supports the left's story, then real wages have in fact declined slightly. You must look at total compensation to see the worker is actually much better off now than five years ago. Benefits have risen by 12%, taking the burden of ever the increasing cost of health care off the worker. With benefits added in, inflation-adjusted overall compensation is up a substantial 10.6% since 2000.

Recent data has shown wages, which are laggards to profitability, are beginning to increase strongly. In the second quarter, annual hourly business wages increased by 7.7%, the most since 2000. With the strength in the American economy poised to keep delivering strong profits along with increased world wide free trade, the American worker should expect his compensation to continue to increase in line with the classical American dream.

2006-10-02T14:23:00.000-04:00

President Bush and the Republican Congress Prove to be Free Traders

When President Bush entered the White House in 2001 the United States had signed into just three free trade agreements with other countries; Canada, NAFTA, and Jordan. Since that time a Republican controlled Congress with the backing of the White House have passed seven more historic free trade agreements and currently is working on agreements with 58 other countries to open trade between borders. This progress of trade liberalization has been under-reported in the media and under-publicized by the politicians responsible for the deals. It is baffling that in an election year, that many think will show Republicans losing big, the Republican incumbents and challengers are not using these ground breaking deals as ammunition in the campaigns. The American public needs to know why these deals are important and how they will be good for America.

Free trade is a cornerstone of American political rhetoric, however it has not been practiced near as much as it is preached. Free trade has proven to open doors to new markets, products, and ideas. These become utilized to their most productive capacity when more market participants are allowed equal access to the resources. The beautiful thing about free trade is that it is not a zero-sum game. Both parties end up winning by increasing wealth of each participant in the transaction. This is due to each country trading a resource valuable to the other for something they themselves value. Each ends up better off because they receive goods or services cheaper relative to what they could produce domestically. The cost savings eventually reach the consumer lowering inflation and expanding household discretionary income.

Since the United States currently possesses the most economic resources in the world, we stand to benefit most from free trade between nations. We can offer economies resources they may not be able to acquire elsewhere or produce domestically and, most likely, at a lower cost. We also open up resources, especially natural resources, to US domestic manufacturers to fill needs in the market and do so without the added cost of tariffs and other regulatory burden. The IT industry in India is a good example of how low regulated trade benefits all parties. The Indian economy receives massive investment from other countries in IT facilities that create relatively well-paying jobs. The company gets the cost saving of lower labor costs which increases profitability. This trickles down to shareholders as well as increases tax revenues to the government.

The Bush Administration and Congress have taken a monumental step forward to open trade worldwide. The economic benefits are substantial and, in the long run, will boost the foreign opinion of America and increase democracratic principles around the world. Those responsible need to be congratulated for their effort and keep pushing to get those many pending agreements signed so others may enjoy the prosperity that accompanies free trade. The voters need to realize that these agreements are good for the American economy and therefore good for America. I ask that voters take this progress into consideration when they step into the voting booth next month.

2006-09-25T18:01:00.000-04:00

Some Optimism for Doomsdayers

Logical realistic optimism is always better.

2006-09-21T13:55:00.000-04:00

Government's Priorities Wrong

In the New York Times yesterday, Thomas Friedman writes an op-ed on the government's current policy of putting a 54 cent per gallon tariff on Brazilian ethanol derived from sugar. This is essentially cutting the US energy market off from the 4.8 billion gallons of ethanol produced by Brazil in 2005. The President and Congress want to talk about reducing our depency on energy from hostile nations, yet they cut off a major supplier right here in our hemisphere. As Friedman says:

We tax imported sugar ethanol, which could finance our poor friends, but we don't tax imported crude oil, which definitely finances our rich enemies. We'd rather power anti-Americans with our energy purchases than promote anti-poverty.

You may ask: Why is this happening? The answer is Congress is submitting to the corn farming and agribusiness lobbies who want their client's products to achieve maximum price. Increasing supply of ethanol will lower the price and those price savings will reach the consumer, you and I, sooner rather than later. These domestic businesses do not want the added competition and supply. This tariff is disrupting the free market trading we all say we are in favor of. Even though removing this tariff is common sense, the political environment could not be more favorable with the amount of free trade agreements Bush has signed. Both major political parties are trying to find anything to reconnect with the American public and increasing gas prices have been the major gripe of the populus. Major points could be scored if one party pushes through the removal of this tariff and the pain of the price at the pump is eased. Also, the strong environmentalist would applaud the choice since sugar ethanol provides net eight times the energy used in production, while corn provides only 1.3 times more. The Brazilians say demand is so high they will have invented new technology within five years to double the energy output of sugar cane. It also reduces greenhouse gases more than corn ethanol.

We are told to look for alternative energy sources and here is one right under our nose. Politicians should realize they are essentially taxing the constituents they are elected to represent by limiting the supply of ethanol through this nonsensical tariff. One party or the other needs to stand up to the lobbyists and prove that they are in fact working for their constituents, the consumers, and not a select few who stand to profit from this anti-consumer policy.

2006-09-19T23:58:00.000-04:00

Jim Holt: The Traditional Fiscally Conservative Choice for Arkansas Lieutenant Governor

In local news, there were debates yesterday between Democrat and Republican candidates in the race for Governor of the State of Arkansas as well as for the position of Lieutenant Governor. I was more intrigued in the dialogue of the Lieutenant Governor candidates since they tended to focus more on fiscal policy. The candidates, Democrat Bill Halter and Republican Jim Holt, expressed differing opinions of the path the state should take to increase the economic production, and thus constituent and state wealth.

Mr. Holt claims he is in favor of tax reductions as a way to attract business investment to the state, while Mr. Halter is in favor of tax incentives. First of all, tax reductions will give businesses permanent incentives to operate in the state, while tax incentives usually are given for a period of time. Secondly, through tax reductions, the entire tax burden on businesses throughout the state, not just certain businesses, is reduced. This brings the Laffer Curve (lower taxes creates more economic activity, thus expanding the tax base) into effect. This will increase small business investment by making entreprenuership more attractive. This incentive for risk taking is the key to wealth development. Tax incentives are not necesarily a bad idea because they can bring good jobs to the state and boost economic activity, but permanent tax reductions have proven to be the better and more sustainable method (look at economic growth in Texas and Florida with their 0% income tax rate).

The two candidates also took on the issue of the minimum wage. Mr. Halter defended the recent state increase in the minimum wage from $5.15 to $6.25 by saying it hadn't been increased since 1997 and inflation had eroded buying power. The question for Mr. Halter is: Why not set the minimum wage at $20 an hour? If the unskilled are really getting it put to them, then why not make everyone middle class? The reason is because free markets do not work like that. Raising the minimum wage simply pushes those lesser skilled workers who were making the old minimum wage out of the workforce. Business owners will force higher skilled more productive employees to take on more of a workload to preserve their profits. In basic economics class we learn price floors create a surplus because prices cannot be lowered enough to take care of excess supply, and that is exactly what happens with the minimum wage, it creates a surplus of workers. Mr. Holt is correct that minimum wage is just politics and a "joke, it's a red herring" and not economic reality. Mr. Halter criticizes Mr. Holt for being the only State Senator to vote against the minimum wage and says Mr. Holt has "a record of putting personal ideology ahead of the best interest of the state." I must say I commend Mr. Holt for standing up for what he believes in. If his constituents do not like it at least they know where he stands and can vote for someone else next time an election comes around. Mr. Holt, agree or disagree with his ideology, captures how the Founders of this country wanted future leaders to govern. He brings ideas and solutions to the table that may or may not be signed into law, and he brings them forward because he believes in something, not just for political gain. If more politicians, liberal and conservative, had the conviction of Jim Holt this country would operate the way it was originally intended.

2006-09-19T19:54:00.000-04:00

A Dose of Medicine for Congressional Spending Addicts

In yesterday's Wall Street Journal, John Fund calls out the Congressional GOP as well as the Administration on spending. Mr. Fund states:

If Republicans lose big in November, one reason will be their tardy response to public outrage over profligate spending.

Spending has been a hypocritical topic for many so called conservative Congressmen as they say they are in favor of small government while constantly trying to find ways to expand it through spending increases. Since 2001; as a Republican controlled House, Senate, and White House has been in place, Congress has added $27 trillion in unfunded liability by passing Medicare Part D, let earmarks and pork get out of control, and further avoided entitlements by rejecting the President's Social Security proposal for private accounts.

Senators Tom Coburn (R., OK), who is one of the of the most principled straight-forward politicians anywhere, and Barack Obama (D., IL) recently proposed, and Congress passed, a pork transparency bill that will create a database, searchable by the public, listing pork in legislation and where it goes. This shows politicians are finally realizing the public is tired of having their hard earned money spent on bridges and railroads to nowhere and rainforests in Iowa. The next step will be to tackle entitlements. Entitlement reform is the key domestic issue facing the young generation and the sooner the problem is tackled the more time we have to figure out what works best. If nothing changes and assuming robust economic growth, entitlements will consume around 33% of GDP by 2050. This will force sharp tax increases, which will shut down economic growth, and force us into a slippery slope tailspin.

Social Security is the obvious place to start since there are already very feasible solutions out there with private accounts. We are talking 2% of income diverted into private accounts where it will be invested and allowed to grow in the markets. The current system actually will produce a negative return on money paid into the system resulting in our generation getting somewhere around 75 cents on the dollar contributed. Current benefits for senior citizens will not be cut and all should have the choice between the current system and private accounts to ensure no one gets stuck in the middle.

The time to act is now and judging by Congress' 20% approval rating, they need to do something...anything. The ideas are out there all we need is more politicians like Sens. Coburn and Obama to step up and take charge to do what is right for America. In the process the GOP may just win back America like they did in 1994.

2006-09-01T14:45:00.000-04:00

Bernanke's Productivity Speech Raises Questions About Current and Future Inflation

Federal Reserve Chairman Ben Bernanke spoke yesterday about productivity in the American Economy. Reading his speech raised some questions about the relationship between economic growth, productivity, and inflation. He says:

From the end of 2000 to the end of 2003, productivity rose at a 3.5% annual rate and, even after recent downward revisions to the data, it is estimated to have increased at an average annual rate of 2.25% since the end of 2003.

There was not a high GDP growth rate over this period of time (2.8% annually). It is obvious that productivity gains are laggards of investment, but if the economy wasn't growing quickly and inflation wasn't rising quickly, then where did the excess money go? As I see it, there are three answers. One being strong corporate profits due to higher margins from cost savings from the uptick in productivity. I don't believe this is the case because competition, especially foreign competition, would keep margins low. Also, the American economy was just recovering from a mild recession and not yet experiencing strong corporate profits. The second explanation would be an increase in wages. This is what most economists have expected but not seen. It is believed that productive workers, if not given raises, will switch firms or even industries where their productivity is more highly valued in the competitive labor market. This has not happened and it seems to be bewildering economists. The third explanation, and the one I am most intrigued by, deals with inflation. I believe the higher margins caused by the productivity gains were reinvested back into the business to increase output at this new found more productive and cheaper level. This increased the supply of goods in the marketplace and kept prices and inflation pressures low. These productivity gains explain why the long period of easy money policy by the Federal Reserve resulted in low rates of inflation coupled with strong economic growth. Goods were able to remain cheap due to cost savings provided through productivity gains. The strong demand for goods created by the availablity of cheap money was filled by the increased production of goods through investment in production I outlined earlier. I believe current inflation pressures are still being held down by the productivity gains experienced in the early years of this decade. As Bernanke said referring to this period:

...productivity growth generally varies with the business cycle, tending to be below its longer-term trend when the economy is contracting and above that trend when the economy is in the early stages of an expansion. This well-documented pattern makes the strong growth of productivity during the early part of this decade, a period that featured a recession and generally slow growth, all the more remarkable.

Looking forward, with productivity increasing by 2.25% since the end 0f 2003, I see a slowing economy, but surely not a recession. The current rate is still good enough to offset some of the inflation pressures into the future. As Mr. Bernanke put it:

..the rate of productivity growth is a primary determinant of economic performance.

and

Economists agree that, in the long run, productivity growth is the principal source of improvements in living standards.

As long as barriers to innovate are low and incentives high in the United States, I foresee these historically high increases in productivity offsetting some the economic problems that we may encounter such as inflation and high energy prices.

2006-08-30T17:33:00.000-04:00

The Private Sector is Always Better

There has been much talk recently about the success, or lack thereof, of the rebuilding efforts along the Gulf Coast in the wake of Hurricane Katrina one year ago. The lack of progress compared to the huge amount of money thrown, around $127 billion to date, at this project is astonishing. I personally am appalled and angered at the inefficiency of the goverment's handling of this situation. Most of the heavily damaged areas still look the way they did 9 months ago, and aside from the new levee, I see not much worth bragging about. There is no amount of compassion that can justify what the government has done with this situation. While the Administration should receive the most blame, Congress has not been in the right. Congress has passed most of the President's proposed emergency spending bills without much debate. When thinking about it, I see why. This kind of "compassionate" spending is right up the pro-welfare Democrat's alley. If you look back the President presented some good ideas, but most of them were removed from legislation by Congress. The President and the American public were in a period of great sympathy at the time and had their fiscally conservative radars down. The Congressional Republicans are the ones who have really disappointed me. They should have brought the conservative problem solving attitude to this terrible situation and proposed options like free enterprise tax free zones to spark business investment and, in turn, economic recovery in the area. Some proposed a 5 year suspension on capital gains taxes, but unfortunately it was not in the final legislation. Other options include suspended income and property taxes to encourage people to work and invests in a home. There are many other incentives that would have allowed the efficiency of the free market to come in and, through competition, quickly and more cheaply rebuild what was lost. Simple free market economics tweaked for the particular situation where the market does the work is usually the easiest and most effective solution to a problem like this. I feel for the people of New Orleans who had to suffer through the tragedy of the Hurricane and then the ineffectiveness of the government in the aftermath. I respect and sympathize with the compassionate reaction of government leaders in handling the situation, but I hope in similar future situations fiscally conservative principles and free market incentives will prevail as the best way to recovery.

2006-08-24T20:15:00.000-04:00

The Monetary Conundrum Explained

There has been much debate in the past year about oil prices, the value of the dollar, and the inflation seen in input commodities. Economist Art Laffer ties it all together in today's Wall Street Journal. He explains that while prices rise in the short term for goods of fixed supplies, like oil, one should not confuse this with general inflation. He explains:

The influence of rapid growth on the relative prices of goods in fixed supply can be magnified by an unrelated decline in the value of the US dollar in the foreign exchanges.

This is exactly what has happened in the last 4 years. There has been a convergence of a 34% depreciation in the value of the dollar and an unprecedented global economic boom. Since these globally traded commodities are listed in terms of dollars, there has essentially been a 34% increase in price due to the declined value of the dollar, while demand has increased driving up price to some degree. The price of oil is determined by the market through supply and demand. In this case supply and demand sets price of not only the product, but also of currency. Mr. Laffer explains inflation is under control when looking at the TIPS spread, or the difference in yields on TIPS and the 10-year bond. This spread tells you the market, which is the most efficient and effective entity when it comes to valuation and prediction, expects 10 year inflation rates around 2.5% a year, a very acceptable rate. This is just one more example that the US economy is in the best shape it has been for some time now. Mr. Laffer points out how good of a job managing monetary policy the Federal Reserve has done in a very difficult environment, and I would agree, but I would like to point out that the dollar needs to appreciate. This can happen either through continued strong economic growth, or through a higher interest rate. These two tend to be somewhat mutually exclusive, so I would vote for a strong economy. Assuming proper policy persists, a real interesting thing becomes apparent; when people figure all this out and realize the strength in the US economy, there will be a large market move to the upside. Dare I say it, but Dow 12,000, here we come!

2006-08-24T18:51:00.000-04:00

Strong Southern Economy Buoys Housing Market

An artilce in today's Wall Street Journal discusses how median sales price of previously owned homes in the South rose by 3.2% from the year earlier. Nationally, this number was a mere .9% from last year. The South also fared better in terms of sales of new homes, building permits, and new residential construction. The article claims this is due to population growth and the fact that housing in the previous 5 years hasn't been as hot in the South as in other regions. I would say population growth is playing a large part in this, but the underlying question you have to ask yourself is; Why is the population growing? The answer is multi-faceted. For one, the Southern economy is booming. It has been overlooked and undervalued for decades and is finally beginning to implement the infrastructure to be efficient and worthy of business investment. Second, as the political landscape moves more to the conservative side, people are going to want to be around people with like beliefs and values. More importantly, conservatism is good for business. For conservatives, there are few better places than the South. Local leaders tend to be conservative (even if they call themselves Democrats) and conservative leaders, of course, are usually good for business. For instance, the only three states in the Union without a state income tax are Texas, Florida, and Tennessee. They are reaping the economic benefits of greater business investment due to low tax rates. Consequently, Texas and Florida have the two fastest growing state economies in the country and Tennessee is quickly moving up to join them. The South also possesses cheaper labor than the rest of the country due to lack of formal education in much of the current labor force. Employers will only be able to enjoy this for a limited time because the greater economic activity will trickle-down and education will improve shrinking the current education and wealth gaps. The bottom line here is that the Southern economy is going through a multi-year, possibly even decade or more, boom. Investment in the area will pay off sooner rather than later.

2006-08-16T11:23:00.000-04:00

The People to Congress: Get a Clue and Repeal the Death Tax

My esteemed junior Senator from Arkansas Mark Pryor today explained his view on the estate tax. His stance here. Basically, he supports lifting the exemption to $5 million from the current $2 million and taxing that at 35%. If Senator Pryor really wants to help the people of Arkansas, especially small business owners, he would support or ,even better, propose an end to the worst tax on the books; the estate tax. Not only is this double taxation (earnings were taxed as income when earned) but is there anyone who thinks it is morally correct to tax death? This is a punishment on entrepreneurship and risk taking that is the basis of wealth development. This tax is limiting investment and is holding the economy back to some degree. There is no way to rationalize this fiscally or morally. Mr. Pryor needs to do the right thing for Arkansas and America and fight to repeal the death tax permanantly.

2006-08-16T10:17:00.000-04:00

Monetary Policy Affects Oil Price? You Bet.

In last Saturday's WSJ, Bret Swanson editorializes an angle on oil prices I, and I am sure many others, have not considered. He hypothesizes that geopolitical risk is not the only risk premium causing froth in the oil market. He concludes $30 of the current oil price is determined by a weak dollar. Another reason for the Federal Reserve to adopt a policy of a strong dollar, and a reason why the recent rate pause may have been a mistake. The logic is since dollars are easy to come by, traders are buying up all commodities they can at "low" prices (through exchange rate adjustments). We need to get serious about our currency. I have not been impressed with the Treasury Department's stance on the dollar and Secretary Paulson needs to make this the focus of his time at Treasury. A strong dollar also will greatly help to improve the trade deficit and, as Mr. Swanson points out, bankrupt nations that hold dollar debts; mainly oil producing countries. He further elaborates on my thesis that there is plenty of oil that is absent of geopolitical risk. The Peceance Basin of western Colorado contains one trillion barrels. That is more than all the proven reserves in the world. As this "problem" of oil continues, we will create technology to tap into these resources.

2006-08-09T10:34:00.000-04:00

Southern Regional Bank Takeovers

There is an ongoing market trend of big national banks buying small regional banks, especially ones with exposure to the South. For instance, there have been many Texas banks bought out recently and news comes today that Iberia Bank is buying a small private Arkansas bank. More evidence of strength is seen when analyzing the IPO performance of HomeBancshares, a small Arkansas bank, that has its success story spelled out in this morning's Arkansas Democrat-Gazette. I can personally offer further proof by testifying that there have been a striking number of banks started in Arkansas over the past 4 years. The message here is that the economy is strong, even in the poorer areas of the country. Investors are finally realizing the growth potential in the South as it finally develops the infrastructure to compete with the industrialists of the North and the innovators of the West. This is a trend I see continuing for some time. It will be driven by further investment of manufacturing as they seek out a cheaper and larger labor market. I find it none too astonishing that the areas being aggressively bought are the areas where big overseas automobile producers have decided to concentrate their manufacturing and infrastructure investment. The Southerners know this and there is strong competition between governors and state economic committees to convince these companies that their state is ripe for investment. Moral of the story: buy into the South. Look for well-run banks in growing local economies with plans for expansion, and if an auto manufacturer announces plans to build a plant in an area; buy aggressively.

2006-08-08T16:55:00.000-04:00

The Oil Chill-Pill

Larry Kudlow posts an interesting article on oil. I find this part particularly interesting:

Meanwhile, Cambridge Energy Research Associates found that the cost of lifting oil has risen dramatically. Since 2002, the average cost of finding, developing, and producing oil worldwide has jumped 35% to $9.13 a barrel. And the cost to produce Canadian oil sands nearly doubled to $25 a barrel now, compared to $14.50 four years ago. Moreover, skilled workers and engineers are increasingly scarce and average wage gains for oil industry employees are now running about 10 percent above last year.

Everyone is freaking out over political unrest in the Middle East and how if we get too involved then we will all be riding bicycles tomorrow. This clearly shows that although we may see a price increase in oil, we will not do without. It is believed by many that the Canadian oil sands hold as much oil as Saudi Arabia. If we experience supply shocks due to the likes of Iran, Venezuela, Russia, and Syria, then we will find a way to quickly get to this oil and through competitive markets, get to it cheaper and quicker as demand increases. This is how free markets work. Where there is a need (demand) for something, people are willing to pay more for it. Companies want to maximize this disparity between price and cost (profit). People are also forgetting that we have the largest coal reserves in the world right here in the US and Canada. We are making great strides in the technology that turns that coal into cleaner-burning gasoline. So, for those who think the world is coming to an end due to lack of oil, take a pill, get a drink, and read a book on Ronald Reagan.

UPDATE: More sedative here.

2006-08-07T15:16:00.000-04:00

Progressive National Sales Tax: Just a bad idea

John Brummett proposes a "progressive sales tax." Just another wool-over-the-eyes trick to increase taxes. Guess who he is trying to target with his tax increases. That's right the rich. It is preposterous to think that the rich would not hide their income from federal taxation if they can. Who wouldn't? It is the same reason industry as well as residents decide to cross over state borders and live in Memphis or Texarkana, Texas where there is no state income tax instead of the Great State of Arkansas. There is greater incentive to hold residence in those states since they can keep more of their income. If they move from Arkansas to either of these states they are essentially receiving a 7% raise. This is why Arkanas and the Federal government are losing part of their tax base. The idea of a national sales tax, or fair tax as it is sometimes referred to, is the best solution to the unfair bewilderment that is the current tax code. The fair tax would tax consumption at a rate somewhere between 17% and 26%. The wealthy will pay strikingly more than the poor because they will obvioiusly consume more. Mr. Brummett's idea of a progressive sales tax is bogus in that it gives people too many chances to hide behind loopholes. If they are going through great lengths to set up tax shelters and off-shore accounts, then surely the rich would be able to hide behind the broad and unclear proposals in Mr. Brummett's article. Currently, the top 50% of income earners pay 96.54% of taxes, meaning the other half pay basically nothing. The top 50% earn $30,000 and higher a year. These are everyday people, who are squarely lower and middle class, not high earners. How is this fair? A sales tax would equalize the tax burden over all income classes. There of course could still be credits and refunds for extremely low earners. This policy would also promote entrepreneurial activity and economic growth as the marginal tax rates would be lower across the board. Over a not-so-long period of time, the fair tax would pay for itself (the Laffer Curve effect), as more domestic businesses started and more foreign investment came pouring in to enjoy our favorable tax rates. This would in effect disincentify the using of these loopholes and tax shelter's that has Mr. Brummett in such a fluster.