Tuesday, August 11, 2009

In the Business of Morality.

From it's inception, the United States has always been a nation of business. The Whiskey Rebellion, the first example of a popular uprising as a response to a federal law, was spurred by George Washington's passing of a tax on whiskey distilleries. The 18th century saw the Industrial Revolution, which brought in the Gilded Age, the creation of the modern-day middle class, as well as big business. Names like Carnegie and Rockefeller, the genius businessmen of their time. These men made millions upon millions--Rockefeller's fortune, when adjusted for inflation, is believed to be the greatest in world history-- by investing aggressively, controlling the competition, and always focusing on the bottom line. President Coolidge even went so far as to say that "the business of America is business." This statement reflected Americans' confidence in the way that businesses handled things, and expressed a view that what's best for the private sector is best for the country.

It comes as no surprise that, with its history of business, America is more conservative than it's European allies. To put things in perspective, the current liberal desire for healthcare reform is seen as a no-brainer in the majority of Europe, and in France, tuition is a thing of the past, as yearly costs are only 150-700EUR. True to its roots, the United States focuses much more on private institutions, shown in the excellence and fame of the Ivy League. At the K-12 level, even the public schools are run as if they were businesses, striving to meet 'production quotas' of students graduating, taking advanced courses, and meeting standardized benchmarks.

I, for one, am a bit put off by the idea that the educational system, which is created to help children become more knowledgable than they would be otherwise, is being treated as a business. Undeniably, education is intertwined with future quality of life. Just compare someone that never went to any surt of educational intitution with a college graduate. Not only will they likely be more successful in the usual benchmarks: career, money, luxuries, but also in their mental quality. An educated mind is more open to the world, and has a greater understand of the way it works. Anything that can influence the standard of a person's life in such a great manner, I believe, should not be concerned only with profit margins and shareholders. I propose that such insitutions are in the business of morality.

This term distinguishes common corporations, such as the myriad of fast food industries, or chain department stores, pretty much anything that a child's mother could say "No," to. Basically, goods and services that, without, the life of the average person would not suffer. If I don't buy that pack of Twizzlers, I'll be okay. If I don't pick up that pack of pens, I'll be fine. If I leave this book at the store, nothing bad will happen. These are normal businesses, selling consumers goods that they want, but don't need. This is fine, in fact, it's the way most businesses are. What about, however, the businesses that do sell things that people need? To find that out, you need only look at oil companies during the gas crises of the 1970s and of 2008. In an effort to raise profits, these companies artificially inflated the price of gasoline, and it worked, giving oil companies record-shattering profits. But why? In a normal situation, say if McDonald's decided to raise the price of a Big Mac to $20.00, the consumers would simply stop buying. McDonald's would see their error, and work to rectify it. However, to simply stop buying gasoline was not an option. Urban sprawl, coupled with the American family's reliance on cars for transportation, ensured that the buyer base would become disgruntled, but was not able to enforce the natural law of supply and demand.

Publilius Syrus said that "everything is worth what it's purchaser will pay for it." This maxim holds true in convential businesses, as I mentioned previously, but in situation like these gas crises, perhaps it should be amended to "everything is worth what it's purchaser believes is a fair price." Perhaps someone views a $20.00 Big Mac as a fair price, but the majority of people do not, and would never buy one. Perhaps someone views $4.00 per gallon of gas as a fair price, but the majority of people do not. However, they will pay it anyway, because to do otherwise would be disasterous to their quality of life.

This idea can be expanded to include raw materials producers, who are necessary for huge numbers of industries. The airplane manufacturing companies would fall to pieces if aluminum prices were to spike, as would computer hardware manufacturers if the price of silicon chips rose; and just imagine what would happen if steel prices shot up as gas prices did. For this reason, many European countries have regulations to ensure that these corporations never cause a disaster in an attempt to enhance profit margins.

Businesses of morality can also be those that render important services to customers, such as electricity, transportation, or education, as mentioned previously. Without any of these services, the standard of living of their customers would deteriorate greatly, as opposed to if they had been deprived of a conventionjal business ervice, such as maid service or that of a groundskeeper. These services have, in the modern age, been transitioned from being simple services to being rights. The problem with these businesses of morality is that they are constantly being torn between the pursuit of greater profit and the pursuit to help their customers. If an electricity company rises prices, it is possible that some of their customers simply will not be able to afford it, and will lose their electricity access. However, the losses incurred from losing these customers will almost certainly be recuperated by the increased payments of the remaining customer base, along with a healthy bit of profit. The only thing stopping the company from doing this is their desire to provide their services to their customers, and the temptation is always there.


N.B. According to a 2006 study published in the academic journal Health Affairs, for-profit hospitals have risen from 11% of all hospitals in the early 1990s to 16%.

Thursday, August 6, 2009

Scorched Earth.

In war, there are a lot of ways to play defense. You can fight right on the battle lines, like the fronts of World War I, where Germans were on one side of the line, Frenchmen on the other, and woe be to anyone who was in between them. You can stage a counter-attack, going straight to the enemy in an attempt to catch them off guard, as well as hoping to get your troops incensed and ready to fight to the death. You can set up an ambush, striking when the enemy least suspects it. You can take the route of the Continental Army (and the Viet Cong), and take up a policy of guerrilla warfare, striking from all angles, then quickly retreating. Or you can do Scorched Earth.

Scorched Earth is a very, very extreme way of fighting a war. It's been popularized by the Russians, as they utilized it to destroy Napoleon's Grand Armee, as well as stop Operation Barbarossa. Under Scorched Earth, when the defending army loses a battle, before they retreat, the destroy everything of value. Farmland, warehouses, all fall to the flames. When Napoleon's army marched through Russia, they were met only with slight resistance and the smell of smoke. Ordinarily, the invading forces would use the resources from their newly acquired land to 'refuel', allowing them to march forward at full strength. When the army, battered and bruised from the harsh Russian winter, reached the capital of Moscow, it was almost completely destroyed. This policy, of course, doesn't recognize the farm owners whose land--their entire life's work--was destroyed with no compensation.

Surely you will agree that this method of defense is extreme, if not completely ludicrous. Then why do we allow the Republicans to follow it? Their vehement opposition to the 'Cash for Clunkers' program is based on not solid facts and reasonable arguments, but only a deep desire to see Obama fail. This is partisan politics at its worst. The GOP doesn't agree with a program where the only thing lost is the opportunity cost from those consumers without a clunker to trade in, on the basis that it is a Democratic bill. Now, they're saying that it's "too successful", pointing to the fact that the money allocated to the program barely touched the ground before it flew into the hands of happy consumers. As if that wasn't ridiculous enough, now the Republicans (as well as their goons at FOX), are using the program's unforseen popularity to strike at Obama's call for health care reform. "If the government is so off about this, who can imagine the mess thay'll make out of healthcare?" I'll start getting worried as soon as a quick-talking sleazeball starts trying to sell me a 'used kidney'.

No, they real reason the Republicans are mad isn't because the program is a miscalculation by the government, it's because they want to see Obama crash and burn; if the nation fails, Obama fails. It is the fact that the program is working as planned that riles them up so much. The funny thing is, this is the type of government economic intervention that appeals to the conservative agenda the most, utilizing finiancial incentives instead of sweeping fiats. However, only Representative Candace Miller (R-MI) has commended it, saying it is "the best $1 billion of economic stimulus the government has ever spent." As for the rest, they have formed another attack on action, with Sen. John McCain threatening a filibuster when the bill to add another $2 billion to the program reaches the senate floor. Their desire to see Obama and the Democrats fall, however, is not their only reason for their opposition. The GOP is attempting to paint government programs as long, inefficient, and complicated, and it's hard to do that when you have a perfect example of why that is wrong.

The $3 billion that Republicans are crying over is nothing to the U.S. budget, but the $4,500 that goes to the American consumer is getting millions of people that would never have considered trading out their old gas guzzler into some fresh new wheels. Considering Bush's $700 billion dollar federal bailout plan practically flew through Congress, it's odd to see that the same Congressman that supported that massive effort of government spending with nary a filibuster attempt is now flying into a rage over Cash for Clunkers. The Wall Street Journal, when asked about the federal bailouts, said the goal was "not to control markets, but to revive them." Spending a sliver of that money on directly helping the American consumer, enviromentalism, as well as small businesses? "Crackpot economics."

Maybe it's not the spending, maybe it's the principle. The idea that governments should never be the ones to influence who the winners and losers are in the economic climate. A sound idea, but both parties have done exactly that. From the G.I. Bill, which allowed returning soldiers to get a good education as well as a home, jumpstarting the growth of the middle class, to subsidizing wool farmers in the 1800s so that they would be able to knit uniforms for soldiers in the Civil War, to adding $35 billion to troubled oil companies (as Republicans campaigned last year), government has always attempted to use control over the economy to shape society.

Cash for Clunkers isn't anything new, it's the smallest of transgressions against the purity of a free-market system. It's just simple stimulus, trying to breathe some life back into Detroit, save consumers $1,000 yearly on gas costs, and maybe help the Earth along the way.


N.B. Last week, Speaker Nancy Pelosi warned that Republicans and insurance companies will resort to "slash and burn" to kill healthcare.

Tuesday, August 4, 2009

Dinner with Mr. Keynes.

Now, I understand that a lot of people don't have a degree or any formal education in economics. I didn't know a thing until I started reading around, so what I've picked up isn't coming from some professor at Generic University, (beat Everyschool State!) it's coming from esteemed authors and economists, as well as a little bit from my own head. It seems that the current economic crisis has brought out everyone's inner Buffett, as ordinary pundits, as well as the everyday America, start pointing at GDP and the stock markets like they belong on the floor of the NYSE. The major point of contention that I've seen is the federal deficit.

Every time a new program is brought up, it's immediately denounced for raising the deficit, as if we'll have China's personal team of collectors banging on the White House saying that we're decades past due. For the normal day-to-day proceedings in our own lives, that may be true. Max out your credit cards with now with no way to pay them back, and sure you'll get phone calls all day. Blank out on the electric bill, and you'll be living in the dark. We like that. It makes sense. If you borrow money, you have to pay it back, that's simple enough. This is the way classical economists see things (as well as microeconomists.) However, like many things, once you draw back the zoom and start looking at the country as a whole, it gets a little different.

It gets a lot different, actually. In my last article, I said that one of the major advantages of the federal financial policy as opposed to that of the states' was the ability for the federal government to run a deficit. In fact, the federal deficit has pretty much become a way of life. Social Security, Medicare, all these programs have to be paid for by the federal government. And no, we cannot simply 'print more money'. We have to get it from somewhere, and that somewhere is China, the up and coming beast of the East. China is one of our largest exporters, something that nearly everyone knows about, due to the ubiquity of "Made in China". In exchange for all of their products, we don't head to some sort of international cashier and start rifling through our wallet, we issue them U.S. treasury bonds. These bonds represent a set amount of U.S. currency, and mature at a later date, usually 30 years from when they are issued. It can be likened to taking out a loan. China holds a huge amount of these bonds, $800 billion worth. (Other large holders are Japan at $600bn, and the UK at $123bn.) The reliability of these bonds depends entirely on the value of the U.S. dollar; if, when China tries to cash in, the dollar is about as valuable as the paper it's printed on, they're going to lose an insane amount of money.

On that topic, one of the words I hear being thrown about all too often is "inflation". I can understand why. It's a scary idea; that all your money starts turning into lumps of paper. This can get incredibly threatening, as in post World War I Germany, when the currency became, literally, worth less than the paper it's printed on. What many of these doomsayers don't realize is that the amount of pressure that it would take to cause the value of the dollar to plummet to disastrous levels would require a massive upheaval of not only the United States's economy, but the majority of the developed world. The same can be done for the idea that suddenly China will try to 'cash in' on the U.S. If China did call in America's debt, there is no way that the U.S. would be able to repay it, leading to an unprecedented economic catastrophe for their country, and China would lose it's biggest importer, leading to not only the nullification of it's billions of U.S. bonds, but eliminating a huge part of their economy. The relationship between the United States and China is a symbiotic one; each nation needs the other to survive.

Although inflation may be a red herring, many news stations aren't broadcasting what is a very real threat to our nation: deflation. As its name implies, deflation is the opposite of inflation; while inflation decreases the value of currency, deflation increases it. While inflation hurts the guy with his life's savings tucked under his bed, deflation hurts the business owner. Instead of encouraging people to go out and spend, deflation encourages everyone to clam up. An increase in deflation can lead a country into a deflationary spiral, just as it did during the Great depression, where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price. Deflation can also cause an artificial increase in interest rates. If annual deflation is at 10%, as it was during the 1930s, even a 0% interest rate is a bad deal, as the initial amount must be repaid with money worth 10% more every year. This leads to a stagnation in business, as the economy grinds to a halt. As if the deflationary spiral was not bad enough, reduction in interest rates in an attempt to combat deflation can lead to the infamous liquidity trap, where interest rates have been lowered as far as they can go, but even that is not enough to stop deflation. This is where monetary policy falls apart.

In the early 20th century, an Englishman named John Maynard Keynes said that maybe, sometimes, the private sector doesn't lead to the best macroeconomic outcomes. In layman's terms, sometimes the bigger picture doesn't look so good, even if the little picture looks great. Keynes advocated what is now a mixed economy, with a predominately private sector, but a large role for the public sector and government. Under Keynesian economic theory, the way to combat deflation and a stagnating economy is to supplement the normal spending with increased government spending. When business slows, the government creates its own business. Another way of fixing the deflation problem would be to provide an increase in the supply of money, giving consumers that would otherwise be unwilling to spend incentive to buy and stimulate the economy. Sound familiar?

- Tom

N.B. As of July 31, the House of Representatives has voted to add another 2 billion dollars to the wildly popular "Cash for Clunkers" program.

Monday, August 3, 2009

California's bleeding.

In case you've been hiding away for a year or so, let me break it to you gently: the economy is hitting some turbulence. Naturally, we can all feel the pangs and repercussions effecting us. Jobs are drying up, credit agencies are running for cover as banks take hit after hit from defaulting mortgages. There's no way to deny that the American family has been sucker-punched by a sudden and deep economic downturn that seems to have come from nowhere. The signs of the recession seem to get more and more severe as one travels up the ladder. Companies are being squeezed out of business as consumers become more and more thrifty and unwilling to purchase anything that may be conceived as a luxury, especially a new car. [This is a topic for a later article.] Bear Stearns, one of the largest and most influential banks in the entire sector went tumbling down only a few days after economist Jim Cramer attempted to reassure his viewers on Mad Money, saying "Invest in Bear Stearns! Nothing is wrong with Bear Stearns!" As it turns out, even the best economic forecasting is, at the base of it all, still forecasting, and subject to the same uncertainties that make it rain even when the meteorologist promised your picnic would go off without a hitch. At the public level, government-funded programs are on the chopping block as disastrously low levels of public income (taxes and the like) are predicted. Obama, in a stunning Keynesian maneuver, injected billions directly into the consumers' pockets, hoping to give the economy the figurative adrenaline shot. Not long-term care, by any means, but something to make sure that we don't completely black out, or red out, as the case may be. The federal government was able to do this because they U.S. government is able to run with a deficit budget without any severe problems. States, however, cannot.

California, at the start of the year, had the largest budget deficit in the country, at a staggering 26 billion dollars. In comparison, Kansas's deficit is a trifle, at $1 billion. California, the state of Prop. N, has a wealth of public programs to spend money on. For one, the massive University of California system covers the entire state with institutions of higher education such as CalState, UCLA, and the MIT of the West Coast, CalTech. California's Proposition 98 requires that 40 percent of the state's budget be spent on education, meaning that public schooling takes up a sizable amount of that deficit. The Golden State also has many social programs, including welfare programs for the disabled, in-home workers, as well as disadvantaged children. California also features MediCal, the state Medicaid program, ensuring that low-income families have access to health care. For families that are above the maximum income bracket for MediCal qualification, the state also has the Healthy Families program, which guarantees medical coverage for 930,000 children. However, despite these programs, California is still relatively out of the ordinary as far as social services, and spends exorbitant amounts on average benefits.

Now that the state is faced with the largest state budget crisis in U.S. history, it's time to evaluate those programs. In July, the state managed to, under heated negotiations, stumble back into the black. In a true sense of conservative glory, legislators managed to accomplish this monumental feat without raising taxes. At all. Rather than impose a tax hike on the Californian public, legislators as well as Gov. Schwarzenegger cut the state expenses to the bone, trimming 16 billion dollars worth of 'fat'. This money comes from early every sort of public program you can imagine, including deep cuts for all of the education services, K-12, community colleges, state universities, the works. Speaking of works, CalWorks, the state welfare system is being sliced up as well. The in-home aides previously mentioned are also suffering cuts, as well as Healthy Families. State workers are also being cut in the form of pay cuts, furloughs, and layoffs. Public transportation takes a hit, as well as redevelopment agencies. In what will probably turn out to be the most controversial and vehemently opposed part of the new budget, over 25,000 inmates will be prematurely released from prison.

To add some numbers to all this, the state university system is posed to increase tuition by roughly 9% as well as decrease enrollment by over 30,000 students as state funding drops by one-fifth. K-12 schools will not be getting new textbooks for another five years, and the school year is losing a week, dropping to 175 days. About 2,000 teachers are also being laid off to combat the new cuts. The Healthy Families program is losing $124 million worth of state funding, but since the federal government puts in double the state's contribution, the program is losing slightly less that half of its budget. Redevelopment projects are going to be forced to cut 2,300 jobs, potentially putting millions of dollars in private investment at risk. Deep as they are, these cuts only account for $16 billion out of the deficit. Where is the rest coming from? Complicated accounting maneuvers to shift money around, including a payment deferral, as well as dipping into some of the local governments' income.

The severity of these budget cuts may seem harsh to many, and are surprising coming from a Democratic state. The classic left-wing position is one of increased taxes as well as increased social services. Certainly a more Democratic resolution would be to increase taxes, in an effort to keep more public programs intact. Why did the Democrats allow a budget free of any tax hikes to pass through legislation? Well, they tried. Although California is decidedly blue, the Republicans still hold 37% of the seats in the state legislature. Usually, this would be a death knell for the GOP in the state, as nothing short of a full-scale tax revolt would return them to power. Ironically enough, the GOP's 37% allows them to stop the policies that would lead to this tax revolt, so that they are just strong enough to preclude ever becoming stronger. Perhaps a better question would be why the Republicans would ever want more power? Their minority, though it is small, is decidedly unified, and can present a brick wall to Democratic legislators. They are able to gun down Democratic budget proposals with impunity, due to the required two-thirds majority.

So, why do the Democrats back down? With their huge majority, they would be able to obliterate any Republican budget proposals, and there's no way that this group of liberals respects the Republican budget on its merit, so why don't they just vote against it? The simple answer: they just can't. It's like the Republicans are holding the state hostage, claiming that they'll shoot unless the Democrats give in. And, of course, the Democrats give in. For them, it's really a 'lesser of two evils' scenario. Either they pass the Republican budget, with all its sweeping cuts, or they allow the state to enter a state of gridlock, preventing anything from being done at all. (Except the issuing of state IOUs.) This scenario isn't exactly favorable to the Republicans either, but it's like mud-wrestling a pig; you'll both be getting muddy, but he'll be having a bit of fun. If the Democrats take a stand on budget negotiations, they get slammed into gridlock, and the Republicans are okay with that. In this manner, Republicans are able to pressure the Democrats into concessions that wouldn't be made otherwise, due to the added force from outside, as banks are starting to refuse to honor the state IOUs, giving the Republicans added clout.

Although it may not be as well publicized as Gates-gate, we can use this, too, as a "learning moment". From this entire debacle, we can see that it would be simply better if states were allowed to run deficits, just like the federal government. If we are to continue to treasure the foundations of federalism and state sovereignty, states must be allowed to perform the countercyclical actions of economic policy creation. If this incredible cascade of budget crises sparks up every time the economy takes a dip, then why have states in the first place? In order to keep states functioning as they should under a deficit, the federal government could infuse them with funds to balance their budgets at a hit to the Federal deficit. In this way, states would be able to use their own policy to effect the nation's economic state. And isn't that what federalism is all about?

The Californian budget crisis also shines a light on one of the buzzwords of the Obama administration, bipartisanship. The supermajority clause in the state Constitution was created to ensure bipartisanship, that is, that neither party would have the ability to completely control monetary policy, without regard to the other. However, this is exactly what the Republicans are doing. Bipartisanship and camaraderie among politicians will not be created as a result of protocol and procedure. It must be created by a genuine desire from both parties to put aside their ideological differences and work together. Attempting to 'force' bipartisanship in the Californian manner is akin to placing two kids who dislike each other in a sandbox and telling them to play. They may stay in there, but you can bet that someone's going to end up with sand in their eye.


N.B. As of July 24, there are calls for a constitutional convention to eliminate the supermajority clause.

Oh. Hey.