2008 November 29 Saturday
Higher California Car Taxes Coming?

California car drivers might soon pay 2% of the worth of their vehicle in yearly taxes.

Reporting from Sacramento -- State lawmakers began moving toward a deal this week to close California's deficit with the help of steeper car fees that would cost many drivers hundreds of dollars annually, according to people involved in budget talks.

Under the plan, GOP lawmakers -- most of whom have signed anti-tax pledges -- would vote to triple the vehicle license fee that owners pay when they register their cars every year in exchange for a ballot measure that would impose rigid limits on future state spending. Motorists' annual license fees would rise from 0.65% of the value of their vehicles to 2%. For a car or truck valued at $25,000, the increase would be $336.

By itself that car tax might only pay for a third of the shortfall expected in the next 18 months.

On the bright side, the public reaction to higher taxes might drive the voters to pass an initiative that places sharp limits on future state budget growth.

Some analysts say that in the current economic climate, the plan could be an unwise gamble for Democrats. Voters, they say, may be inclined to approve the kind of spending restraints that GOP lawmakers have long sought. The Republicans' proposed cap would limit growth in government to a modest percentage each year, regardless of how well the economy does and how much revenue flows into the state.

"I suspect the public would vote for it," said GOP political analyst Tony Quinn. "This deal could make a lot of sense from the perspective of Republicans."

Part of the "solution" proposed by the Governator is more borrowing. Enough borrowing already.

The man in the middle, politically and fiscally, is Gov. Arnold Schwarzenegger, who is looking about three years down the road, roughly coinciding with his departure from Sacramento.

Schwarzenegger's centerpiece is a 1.5-cent sales tax boost for three years. Another important piece is borrowing $15 billion against the state lottery's profits to provide $5 billion a year for three years. Many of his spending cuts are also limited in term.

Schwarzenegger's approach conflicts with forecasts of potentially immense deficits for many years because of economic uncertainty and the underlying structural deficit, and because so many recent fiscal moves are short-term gimmicks. It could leave his successor with a big mess.

Temporary measures will not fix the problem.

The latest deficit in the California state budget came on very quickly.

Nov. 6 (Bloomberg) -- California Governor Arnold Schwarzenegger said his state's finances have deteriorated so rapidly that a budget he signed just six weeks ago has already fallen into a $11.2 billion deficit and taxes must be raised.

How could we solve this problem without tax increases or spending cuts? Deport the illegal aliens and many state government costs would plummet.

Californians for Population Stabilization (CAPS) says that a 2004 study indicated that California's illegal alien population imposed a net cost of $9 billion per year on the state's taxpayers just for education, medical care and incarceration. "After adjusting the figure for current costs and increases in the number of illegal aliens, it would exceed the state's projected deficit," according to Diana Hull, the organization's president, "and this is a very conservative estimate."

We might be able to move to a budget surplus if we deported the illegals.

The costs of illegal immigration to California are likely much higher. A 2007 study by Philip J. Romero, formerly a research economist at RAND, top economic adviser to Governor Pete Wilson and later Dean of the University of Oregon School of Business, estimated that illegal aliens in California receive somewhere between $10 and $38 billion more in state services than they pay in state taxes.

We've imported a 3rd world population into a 1st world economy. Decay lies in our future.

By Randall Parker 2008 November 29 01:40 PM  Economics Government Costs
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Cal State University To Cut 10000 Slots In Budget Crisis

The worsening of the multi-year California state budget crisis is leading to a cut in the number of available positions for incoming students in the California State University system.

The California State University system for the first time in its history is proposing to turn away qualified students due to a worsening state budget crisis.

As part of a plan to slash its 450,000 enrollment by 10,000 students for the 2009-2010 academic year, the 23-campus system, the nation's largest, will push up application deadlines and raise the academic bar for freshmen at its most popular campuses, Chancellor Charles B. Reed said Monday.

Modest proposal: Offer more online courses. Also, video record courses so that students at all Cal State campuses can watch any course. This is pretty cheap stuff to do.

The cost of tuition in the Cal State system is pretty cheap. That's partly because the many of the classes are large. Well, why not watch those classes on pre-recorded video at the times of the students' choosing? Way more convenient. Plus, one could watch different professors at different campuses teach the same class.

Cal State currently receives $2.97 billion of its budget from the state's general fund and $1.5 billion from student fees. The system has raised fees six times in seven years. The cost of attending a Cal State college, not including housing, books and other living expenses, is about $3,800 a year.

It is a waste of labor to have someone stand up in front of a class every year at every campus and teach freshman chemistry. It is a waste of labor to do the same for basic biology, macroeconomics, microeconomics, and many other topics. Record the best lecturers on these subjects. Let students watch them. One can still offer optional extra cost discussion sections for questions.

Testing needn't be paced to a semester or trimester schedule. Develop standard online tests for these subjects. Let students file into a room with ID checks, sit down at computers, and take whatever tests they think they've prepared themselves for. This will cut the costs of lecture halls and professors. College education could be made affordable and state budget crises would cease to impact course availability and number of available slots.

The automation of education is an urgent need. Cal State Chancellor Charles B. Reed says applications to the Cal State system are up strongly. These students need video recorded lectures and online tests.

He noted that even as Gov. Arnold Schwarzenegger was proposing more cuts, “applications for fall 2009 are up almost 20 percent from last year, with a 36 percent increase in applications from community college transfer students.”

“Student demand is increasing while state funding is declining,” the chancellor added.

By Randall Parker 2008 November 29 09:49 AM  Education
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2008 November 28 Friday
Citigroup Government Deal Pressures Competitors

From just one bank the US taxpayers might be on the hook to the tune of $1000 per person. For net taxpayers the potential cost might be several times that amount. This assumes a worst case for future Citi losses.

Before long, anxious investors may start wondering which banks will be vulnerable next. If confidence fades, other big lenders will probably seek deals like Citigroup’s, in which the government has pledged to pick up potentially $290 billion in additional losses. Regulators drafted the plan with an eye to using it as a template for future bailouts.

But there's no guarantee that Citi won't come back with massive corporate loan losses or credit card losses. The people laid off in 2009 are going to default on more mortgages, car loans, credit card loans, and assorted personal loans.

There are other worries for Citigroup’s big rivals. Almost overnight, Citigroup went from being the sick man of the industry to an institution with an edge over its competitors. The government is guaranteeing $250 billion of risky assets and pumping an additional $20 billion into the bank.

With the government behind it, Citigroup may now be able to borrow money in the capital markets at lower interest rates than its peers.

This reminds me of Ford's position on a GM and Chrysler bail-out. Basically Ford is saying they have enough cash that they won't go bankrupt in 2009. But if GM and Chrysler get lower interest rate loans then it is only fair if Ford gets them too. Ford has a point. Lower costs of capital for competitors put it at a competitive disadvantage. Well, Citi's bailout puts JP Morgan Chase, Wells Fargo, and Bank of America at a competitive disadvantage. If they all get bailed out that puts all the smaller banks at a competitive disadvantage. The less efficient players survive and the more efficient players lose market share. That's bad.

But one of the problems with allowing a really big bank to fail is that large numbers of companies have their checking accounts with them. Deposit insurance does not cover their deposits since the payroll checking accounts and other accounts end up running into the millions and beyond.Companies will suddenly start bouncing checks which will cause their suppliers cash flow problems and this will propagate.

On the other hand, if the banks all get bailed out that cuts the incentive for avoiding risky lending. Plus, it becomes really expensive for the taxpayers. The mispricing of risk is incredibly expensive. We all pay for it.

The big open question at this point: How many big credit losses lie in the future for Citi, BofA, JPMorgan, and other banks? Will credit cards, corporate loans, and other kinds of loans cause new rounds of massive losses? Also, how can the banks be regulated in a way that reduces the size of future too-big-to-fail bailouts?

Bill Clinton's former Treasury Secretary Robert Rubin helped steer Citi down a path that made this debacle.

The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.

Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

So Robert Rubin did a lot of the regulatory loosening that the Bush Administration is blamed for doing.

Remember how Barack Obama was supposed to be about change? Obama is appointing former proteges of Robert Rubin. Meet the new boss. Same as the old boss.

Geithner is a protege of Summers' and of former Clinton administration Treasury chief Robert E. Rubin.

Will Geithner demonstrate more sense at the Treasury than Rubin did at CitiGroup?

More fundamentally: Will the bankers and the regulators learn enough lasting lessons from this disaster to prevent it from happening again for a few decades?

Robert Rubin doesn't want to admit he is part of problem. More top people in the bailed out banks should be fired.

By Randall Parker 2008 November 28 10:15 PM  Economics Financial Regulation
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2008 November 26 Wednesday
Why We Are Pussies About The Pirates?

Bret Stephens looks at the fairly lame response of various nations to the East African pirates.

A multinational naval force has attempted to secure a corridor in the Gulf of Aden, through which 12% of the total volume of seaborne oil passes, and U.S., British and Indian naval ships have engaged the pirates by force. Yet the number of attacks keeps rising.

Why? The view of senior U.S. military officials seems to be, in effect, that there is no controlling legal authority. Title 18, Chapter 81 of the United States Code establishes a sentence of life in prison for foreigners captured in the act of piracy. But, crucially, the law is only enforceable against pirates who attack U.S.-flagged vessels, of which today there are few.

What about international law? Article 110 of the U.N.'s Law of the Sea Convention -- ratified by most nations, but not by the U.S. -- enjoins naval ships from simply firing on suspected pirates. Instead, they are required first to send over a boarding party to inquire of the pirates whether they are, in fact, pirates. A recent U.N. Security Council resolution allows foreign navies to pursue pirates into Somali waters -- provided Somalia's tottering government agrees -- but the resolution expires next week. As for the idea of laying waste, Stephen Decatur-like, to the pirate's prospering capital port city of Eyl, this too would require U.N. authorization. Yesterday, a shippers' organization asked NATO to blockade the Somali coast. NATO promptly declined.

I think problems should be solved. Courses of action should be considered in light of the question of how to most quickly and easily to solve a problem. This attitude puts me at odds with how the people who run governments reason about so many problems.

Some people point to Thomas Jefferson's response to the Barbary Pirates as an example of a more uncompromising and violent response to pirates. But a careful reading of that history finds that before and at the end of the war Jefferson's government consented to pay the pirates. Now, Jefferson was much more willing to use military force. But he was willing to negotiate with them.

We could stop piracy pretty quickly by flagging all cargo ships in the region with American flags, refusing negotiation, and killing all pirates. We could even stop piracy with a less extreme response which still involves taking back all hijacked ships by force with no more ransoms while keeping captured pirates alive. But the West has grown soft and so the piracy will continue.

In the 18th century the margin for survival was much lower. Ships' captains could not afford the risk (and probably not even the food) of keeping captured pirates on board. A weak new United States had little in the way of a navy and so was tempted by the idea of paying protection payments to the Muslim rulers of North Africa.

Curiously, one motive for Jefferson's war against the Barbary Pirates is that he thought victorious war would be cheaper than tribute. Jefferson fought war in order to reduce the size of government. What a different era he lived in.

By Randall Parker 2008 November 26 10:45 PM  Civilizations Decay
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Sovereign Wealth Funds Shift Out Of West

If Sovereign Wealth Funds are so formidable why are their managers shifting out of the West at the bottom of the market? (or at least close to the bottom)

Sovereign wealth funds in the Gulf are switching their focus away from Western stock markets to shore up ailing economies in the Middle East and protect themselves from losses in the City and on Wall Street.

Investment funds in Kuwait, Qatar, Dubai and Abu Dhabi are understood to be changing their investment strategies after losing billions of dollars buying shares in Western companies. Several Gulf-based banks are being propped up with state investment. Local stock markets have collapsed and some funds are shifting their assets into local shares in an attempt to inject confidence.

Government-run investment funds aren't going to out-perform the market in the best of times. But if they sell at the bottom they are really going to under-perform. Also, shifts toward Middle Eastern investments seem like an unwise way to make up for the losses. The Middle East still has some boom times ahead of it when oil prices recover. But eventually depleting oil fields will send the Middle Eastern oil sheikdoms into economic decline. East Asia would be a better bet.

By Randall Parker 2008 November 26 07:54 AM  Economics Sovereign Funds
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2008 November 25 Tuesday
Britain Raising Taxes On Higher Incomes

While the British government abandoned (or at least temporarily shelved) secret plans to raise their VAT sales tax from 17.5% to 18.5% it is going forward with a big tax increase in higher income workers.

The Treasury is expecting to recoup £1.6 billion a year from increasing the top rate of income tax from 40 per cent to 45 per cent for workers earning more than £150,000 and a further £1.6 billion a year from scrapping the tax-free personal allowance for higher earners.

However, the influential Institute for Fiscal Studies (IFS) said that the 45 per cent rate would raise “approximately nothing”. Higher earners could avoid paying the tax by contributing more into their pension plans, giving more to charity or leaving the country.

Those earning more than £150,000 will face an effective tax rate of nearly 60 per cent once national insurance and other taxes such as VAT and fuel duty are taken into consideration, the IFS said, which would prompt those with high incomes to seek ways to avoid paying the tax.

Some of those workers have to work in Britain to make their higher income salaries. But not all of them do. What I'm looking for: the emergence of countries that high income mobile people migrate to in order to escape home country taxes. We see that some already. But will some countries become specialists in attracting these sorts of workers? Some low tax locales are not attractive for other reasons such as weather, lack of infrastructure, remote location for business trips, immigration rules, political instability, political repression, and other downsides.

Not all countries with high marginal tax rates will generate these ex-pats. The US government taxes Americans living abroad almost the same as Americans at home. One has to give up US citizenship to escape from the reach of the US Internal Revenue Service (and even then there's a tax as you depart). But some countries do not impose income taxes on their ex-pats. It is my understanding that Britain is one of the countries that do not tax citizens working abroad. Anyone know if that is correct?

By Randall Parker 2008 November 25 09:00 PM  Politics Redistribution
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2008 November 24 Monday
US Federal Government To Provide $7.76 Trillion In Funds

The debt guarantees, loans, preferred stock buys, and commercial paper purchases are really adding up. Get your mind around the enormity of what's happening in banking as a result of the financial crisis.

Nov. 24 (Bloomberg) -- The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

That's a staggering number. What I want to know: Can the Fed inflate the money supply far enough to turn the price deflation into an inflation?

You hear a lot about the US Treasury's TARP program. But the Federal Reseve has lent more than 3 times the amount of money the US Treasury has provided.

Wall Street analysts, congressional overseers and the media have parsed every detail of the Treasury Department's financial rescue program -- $250 billion and counting.

Largely outside public view, however, the Federal Reserve is lending far more than that amount -- $893 billion, roughly the equivalent of the annual economic output of Mexico -- to help a wide range of institutions weather the economic storm.

As of last week, the Fed's loans included $507 billion to banks, $50 billion to investment firms, $70 billion for money market mutual funds, and $266 billion to companies that use a form of short-term debt called commercial paper. It is considering a new program that would make billions more available to prop up consumer lending: auto loans, credit cards and the like.

The changes away from previous trends at the macroeconomic level are breathtaking. The mortgage-backed securities (MBS) market has collapsed. Any mortgage lending can only be done by financial institutions that have enough money on deposit to fund new mortgage loans.

But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.

It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.

Housing prices were inflated and need to fall further until ratios of housing prices to incomes and other housing price indicators fall closer toward historical trend lines. The collapse of the MBS market helps to drive that needed correction.

In the face of a rapidly contracting economy and falling prices the new Presidential Administration is looking to do a big spend to prop up the economy.

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years.

So far all the efforts to put Humpty Dumpty back together again are not working. Goldman Sachs expects the economy to start contracting at a 5% annual rate.

Last week, Goldman Sachs said it expects the economy to shrink even faster by the end of the year, at a 5 percent annualized rate. Meanwhile, the Dow Jones industrial average dropped 5.3 percent for the week; and the nation's largest bank, Citigroup, sought government assistance to avoid collapse.

Obama's economic stimulus probably isn't going to help. He'd do more good if he cut taxes in half and then the Fed bought up all the T-bills needed to finance the tax cut.

By Randall Parker 2008 November 24 09:41 PM  Economics Credit
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Zimbabwe Still Going Down

One wonders just how much worse Zimbabwe can get. Will it keep going down until the government collapses or a civil war starts? Will it just go down further and stay there? What's the end game? A cholera outbreak adds to the mounting woes of the formerly well-governed Rhodesia.

The situation in Zimbabwe may soon "implode" as a cholera outbreak spreads and basic services collapse, South African leaders and a group of international statesmen warned yesterday.

On the eve of talks in South Africa between Robert Mugabe's Zanu-PF party and opposition rivals, South African leaders sharply upgraded their crisis assessment and warned of Zimbabwe's imminent collapse if urgent action was not taken.

These leaders see urgent action as coming in the form of Western economic aid.

Of those who managed to get admitted to hospitals 300 died of cholera. The real number dead is suspected of being 4 times more.

There is sewage flowing in the streets, endless mounds of rubbish, a broken water supply – and a cholera epidemic that has Zimbabwe’s Health Minister admitting that he is scared.

This is the grim picture that a team of international statesmen would have seen in this suburb of the capital, had they not been barred from Zimbabwe. It is a picture common all over the country, with the World Health Organisation saying that by late last week about 300 people had died from cholera and 6,000 had been infected. Médecins Sans Frontières, the international health charity, estimates that 1.4 million people are at risk.

I do not see how thousands of people dying from cholera are enough to cause the collapse of Zimbabwe.

Kofi Annan says hundreds of millions of dollar are needed to buy food and other basics. I say spend a fraction of that money on mercenaries who get a huge cash reward for wiping out the rulers of Zimbabwe.

Fellow Elder and former UN Secretary General Kofi Annan added that there was a $140m shortfall between the aid provided by the international community and what was required.

The international aid community would need to find $550m next year, he said.

If the people who claim to care a great deal about the suffering in Zimbabwe wanted to drastically reduce that suffering they'd advocate for a quick violent jab at the top of the Zimbabwe government. Cut off the head. Replace it with something better. Mind you, better won't be great. Better won't even be good. Better will just be less bad.

The pirates off of Somalia remind me of Zimbabwe. But the pirates seem worse. One can say that Zimbabwe isn't our problem. It is the problem of the Zimbabweans. But the high seas are needed for commerce. Therefore lawlessness on the high seas simply shouldn't be tolerated at all. The tolerance shown toward Robert Mugabe shouldn't be shown toward ship hijackers.

By Randall Parker 2008 November 24 08:03 PM  Civilizations Decay
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2008 November 23 Sunday
Iraqi Kurds Arming For Conflict

The Kurds do not want to remain part of Iraq. Democracy hasn't reconciled them to being ruled by Arabs. They see no reason to trust the majority Shia Iraqis. The Kurds would be better off on their own. But the US government does not want Iraq to split up. The Kurds are buying arms from Bulgaria. They are probably using oil revenues to fund these purchases.

BAGHDAD -- Kurdish officials this fall took delivery of three planeloads of small arms and ammunition imported from Bulgaria, three U.S. military officials said, an acquisition that occurred outside the weapons procurement procedures of Iraq's central government.

The Kurdish region has been functioning de facto separate from the rest of Iraq for many years and since the US invasion the area ruled by the Kurdish government has expanded to include more Kurds. Also, large numbers of Kurds fled Baghdad in response to many attacks against them by Arabs.

The Kurds see the US withdrawal coming and they are preparing for confrontation.

The large quantity of weapons and the timing of the shipment alarmed U.S. officials, who have grown concerned about the prospect of an armed confrontation between Iraqi Kurds and the government at a time when the Kurds are attempting to expand their control over parts of northern Iraq.

Will the Arab government in Baghdad try to use force to keep the Kurds in Iraq? Will the Turks support the Arabs against the Kurds? How is this going to play out? The Kurds have borders with Syria, Turkey, Iran, and Arab Iraq. Which side will each of the other neighbors take in a war between the Kurds and Iraqi Arabs? I'm expecting the Iraqi Arabs to be pretty ineffectual fighters. Will the Sunni Arabs side with their fellow Arabs? Or will the Sunnis try to break off from the Shias?

Conceivably the Kurds might arm so well that the Arab government will allow them to remain de facto independent as long as the Kurds do not announce total independence from the government in Baghdad.

By Randall Parker 2008 November 23 04:41 PM  Mideast Iraq Ethnic Conflict
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2008 November 22 Saturday
Inflation-Adjusted Gasoline Prices Back To 1960s

Mark Perry, an econ prof at U Mich Flint, says that adjusted for inflation the $2.12 national average gasoline price of last week is cheaper than any time before the 1960s.

The chart above displays real gas prices going back to 1919 ( data here), showing that the current national average price of $2.12 is below the price of gas during the entire decades of the 1920s, 1930s, 1940s, 1950s, about the same as the average price during the entire 1960s, below the average price during the 1970s, and below the average real price of gas during the entire 1919-2008 period ($2.36).

Click thru to see his inflation adjusted historical gasoline price graph. The most surprising thing about the graph: Gasoline was much cheaper during the 1990s (the hey day of the SUV) than in the 1960s. Back in the late 1990s the inflation-adjusted price of oil fell below the 1960s oil prices.

By Randall Parker 2008 November 22 02:02 PM  Economics Energy
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2008 November 20 Thursday
Car Companies Need Bankruptcy To Escape UAW?

What I find most troubling about the proposals to loan tens of billions of dollars to GM, Ford, and Chrysler is that these proposals ignore the biggest reason why the Big (and continually shrinking) Three have been in decline for decades running: Companies with much higher labor costs can not compete with companies that have much lower labor costs. The US Congress has kept the Big Three in a bleeding bear hug with the United Auto Workers. At the recent US Senate hearings where the 3 US domestic auto company CEOs pressed their case for big government while an economist at University of Maryland, Peter Morici, presented an opposing argument.

The gradual erosion of the market shares, of the Detroit Three, over the last several decades, stems from higher labor costs, having origins in wages, benefits, work rules, poor management decisions and less than fully supportive government policies.

Although the government has been sympathetic, to the needs of this industry, the industry has fallen victim to currency manipulation and other forms of protectionism, predominantly in Asia, in Japan, Korea, China, India and elsewhere. The Detroit Three are rapidly running out of cash and face filing for Chapter 11 reorganization.

It's my position that it would be better to let them go through that process and reemerge with new labor agreements, reduced debt, strengthened management. That would permit these companies to produce cars at costs comparable to those enjoyed by their Japanese and other foreign competitors assembling vehicles in the United States.

There is an alternative: impose tariffs on imported cars and also force domestic plants run by foreign competitors to accept a union. But to do that would require the admission that, yes, labor costs are the biggest problem.

Morici argues that loans would just delay the inevitable because as long as the UAW (with a big body of US government labor laws to give the UAW legal power to extort from the Big Three) forces the Big Three into uncompetitive labor costs the continued decline of the Big Three is assured.

Today, the Detroit Three have achieved remarkable progress in improving productivity and lowering labor costs, thanks to a new agreement with the UAW. But they still don't have costs quite as low as their Japanese transplants.

This is an industry with very thin margins. I've heard over and over again, for example, when Ford decided to locate its small-car factory in Mexico, that the UAW tried to persuade Ford that it could be competitive enough in the United States.

There is no such thing as competitive enough in the automobile industry. Either you hit the mark that Honda hits, in Indiana, or you are not competitive. The margins are too thin. There's too much excess capacity. Either the costs are the same or they're not. There's no such thing as almost as competitive.

By assisting the Detroit Three, Congress can delay one or all of them from going through Chapter 11 reorganization. But sooner or later, one of them will march down that path.

Here's another alternative: Congress could repeal the labor laws that enable the UAW to drive the Big Three into bankruptcy. Let the Big Three throw the UAW out of their plants and I bet suddenly the credit ratings for the Big Three would soar.

Morici says that the Detroit Three must have the same labor costs as their competitors or die.

Without a new labor agreement that brings wages and benefits absolutely in line with those at the most competitive transplant factories, without reduced debt and other liabilities, the Detroit Three will continue to lag in innovation and field too few attractive vehicles because their higher cost, debt and other liabilities require them to spend less on new product development than they should. General Motors makes about the same number of cars globally as Toyota. It simply has a smaller product development budget because of the cost it bears. They have very fine engineers. They are capable of producing very good cars. The same applies at Ford.

If you have less money to develop product, you put fewer products on the street. They have a longer life. For example, the Impala was a great car, but it was left sitting out there for seven years. Camry recycles every four.

People who complain about the rate at which the Detroit makers rev their designs miss why this happens: Toyota pays less in manufacturing labor costs and therefore has more money to pay for engineering labor and other engineering costs. Toyota can outspend GM in engineering. The fact that GM has managed to last as long as it has with this huge disadvantage probably comes as a result of a combination of American customer loyalty for the home team and a high level of productivity per engineer and manager among the Detroit Three.

Free trade and a union with a labor monopoly in only some companies is not a sustainable combination. The union either has to cut its costs or companies have to shut down plants and stop using the labor union's high priced labor. The Big Three really need to move abroad and stop using UAW labor.

The Democrats want to bail out the US car companies because they want to retain high union wages in US companies. Barney Frank wants the US car companies to find a magical way to survive in spite of uncompetitive labor costs.

BARNEY FRANK: Bankruptcy would be very disruptive. Bankruptcy is a favorite spectator sport for politicians and experts who don't have to engage in it. You have a whole network of suppliers--small businesses and others--who would get "stiffed," to use the legal term, in a bankruptcy.

There is also an assumption that if you do bankruptcy, you could undo labor contracts. Now the unions to their credit have negotiated some concessions. But you know, we already have too much union-busting and too much income inequality for the average worker in this country for us to now say by the way, if you're a company and you haven't been able to totally get rid of the unions, then go bankrupt and rewrite, write down the contracts.

You have to admire this irresponsible audacity. What nerve the guy has. GM is weeks away from running out of money. But Frank thinks the unions shouldn't have to give up squat.

House leader Nancy Pelosi insists the auto makers show how they can become profitable.

"Unless they can show us a plan, we can't show them the money," said House Speaker Nancy Pelosi.

Nancy's House has the power to change the labor laws in a way that will allow the auto makers to compete. Congress holds the most powerful cards. But they do not want to admit they are the cause of the problem.

I do not know whether the auto makers can escape from the UAW in bankruptcy or whether they can avoid liquidation in bankruptcy. We would be better off if the auto makers could escape the UAW without going into bankruptcy. If Congress loaned them enough money to relocate their plants to Mexico and Canada that would probably enable them to compete. But can automation and other cost cutting measures eventually allow the Big Three to compete without totally escaping the UAW? The politically possible two choices of either government loans or bankruptcy both have big risks.

By Randall Parker 2008 November 20 10:12 PM  Economics Transportation
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2008 November 19 Wednesday
Deflation Brings Great Deals For Rich People

Rich people who managed to hang onto their cash during the economic decline can find great deals in the sorts of products and services they buy. Luxury hotel prices are down.

For instance, room rates at luxury hotels fell 5.4 percent in the 28 days ending on Nov. 15 — in contrast to a 1.3 percent increase in rates at midscale hotels that do not serve food, estimated Smith Travel Research, a firm that studies the industry. Over all, hotel prices fell 1.6 percent in October, according to the Labor Department.

High end retailers are cutting prices.

High-end retailers are resorting to drastic discounting to lure customers into stores. Executives at Nordstrom, the department store chain, said on a recent conference call with analysts that the company had lowered prices on more than 800 clothing styles by an average of 22 percent.

Next time you hear someone complaining about the economy tell them they have a bad attitude. This is a new era of opportunity and fun if you have the right credentials. If you can gain entrance into the upper class what a great time to be filthy rich.

But this is a tragic time if you happen to be a new luxury automobile. Large numbers of Mercedes are becoming homeless orphans at the Long Beach Californa shipping port.

LONG BEACH, Calif. — Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times.

For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property.

And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril.

These immigrant cars come off of long cargo ship voyages to discover no one in America will love them. Sob.

By Randall Parker 2008 November 19 10:35 PM  Economics Living Standards
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2008 November 18 Tuesday
China Becomes Biggest US Treasury Buyer

China has passed Japan as the biggest holder of US government sovereign debt.

China led all foreign official investors in September by posting a net increase in U.S. Treasuries for the sixth month in the past seven, bringing its total ownership close to $600 billion. Japan was a net seller of Treasuries for the fourth month in the past six.

Some people amazingly see this as a positive development.

“The details of the report paint a much more positive picture of cross-border investments than expected,” said Michael Woolfolk, a senior currency strategist at Bank of New York Mellon Corp. “China, along with others, is showing more demand than anticipated for U.S. assets.”

This guy is a senior currency strategist. What explains his statement? Is he long on US dollars? The Chinese buying of US Treasuries boosts the value of US dollar versus the Chinese currency and therefore makes Chinese goods cheaper in the US and US goods more expensive in China. This increases the flow of goods from China to the US and decreases the flow in the opposite direction.

I tend to think of investments as purchasing of productive assets. By that measure the Chinese government is not investing in the United States.

If China's government did not buy US Treasuries then the interest rate in the US would rise. The higher interest rate would serve as an incentive for more private savings by US citizens. It would also serve as a signal to the US Congress and President that they are spending and borrowing too much. The East Asian purchases of US debt effectively encourages the American people and their leaders to live beyond their means.

By Randall Parker 2008 November 18 10:41 PM  Economics Trade
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2008 November 16 Sunday
Dead Parrots And Dead Slaves: He's Just Resting

There is nothing new under the sun. Do you remember the Monty Python Dead Parrot sketch?

Mr. Praline: Look, matey, I know a dead parrot when I see one, and I'm looking at one right now.

Owner: No no he's not dead, he's, he's restin'! Remarkable bird, the Norwegian Blue, idn'it, ay? Beautiful plumage!

Mr. Praline: The plumage don't enter into it. It's stone dead.

Owner: Nononono, no, no! 'E's resting!

In an earlier era dead slaves served the place of dead parrots. But what about their plumage?

For those who believe the ancient Greeks thought of everything first, proof has been found in a 4th century AD joke book featuring an ancestor of Monty Python's Dead Parrot sketch where a man returns a parrot to a shop, complaining it is dead.

The 1,600-year-old work entitled "Philogelos: The Laugh Addict," one of the world's oldest joke books, features a joke in which a man complains that a slave he has just bought has died, its publisher said on Friday.

"By the gods," answers the slave's seller, "when he was with me, he never did any such thing!"

This is great. Are Monty Python troop members reincarnated Greek joke tellers? That would explain the Australian philosophy department.

By Randall Parker 2008 November 16 08:05 PM  Human Nature
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2008 November 15 Saturday
University Of Iowa Restricts Online Prof Teaching

Some professors responded too much to financial incentives for the university's liking.

The University of Iowa has capped the number of online students and courses that faculty members can teach after discovering a handful of professors received hefty bonuses for teaching up to three times more classes than their regular loads.

The university doesn't want too much market forces and incentives driving professors to work harder. The U of I Provost Wallace Loh has now placed a limit of 1 course per semester with at most 36 students per course. This limit puts a ceiling of about $10000 on income from online courses. The justification: teachers can't teach several courses at once.

Big lecture classes have hundreds of students in them. Why limit online courses to a tenth their size? Given that online courses can use more automation than in-person teaching this limit seems like an unnecessary obstacle in the way of the future of education.

A small number of professors showed themselves as very responsive to economic incentives. What's the problem with the rest of the faculty?

Fourteen U of I professors were paid overload bonuses in excess of 30 percent of their base salaries for the year that ended June 30.

The bonuses, which ranged from $17,000 to $120,000, were paid to professors who taught additional classes beyond the four per school year required by the university.

In the most extreme example, a popular U of I health science professor was paid $121,000 in overload pay on top of his $74,000 salary for teaching 14 courses last year - 10 courses more than the required load.

Higher education is an enormous cost burden and entirely too labor intensive. Universities should be trying to move more of their course delivery online in order to cut costs and boost productivity.

What education should look like in the future:

  • Courses should be delivered via live lectures, recorded lectures, interactive learning software, in-person question and answer sessions, web Q&A sessions, and email Q&A. People should be able to take a course on the web without applying to a college for admission.
  • Test delivery should be separated from course delivery. In other words, how you take a course should be decoupled from the format of the tests you will take to see if you mastered the material. One would take courses in any form to prepare for tests.
  • Tests in many subjects should be standardized by professional organizations such as the American Chemical Society, American Physical Society, and other professional societies. The test administering organizations should be different than the test creation organizations so that one can go one place and take tests from different professional organizations.

Recorded lectures would allow one to watch lectures by different experts on the same subject. Don't like one guy's presentation of basic chemistry? Watch 2 or 3 others. Since the recorded lectures would be watched by many more people than sit in a lecture hall the cost per viewer could be an order of magnitude or more lower than typical college course tuition prices.

By Randall Parker 2008 November 15 07:02 PM  Education Online
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Some West Bank Israelis Want a Buy-Out

About 40% of the West Bank Jewish settlers (or squatters if you prefer) would leave if offered enough cash for their houses. They do not like living among hostile Palestinians and some even think it is wrong to live there.

There are 280,000 settlers in the West Bank (200,000 more Israeli Jews live in East Jerusalem, also captured in 1967), and the vast majority are firmly committed to staying and oppose a Palestinian state here. But 80,000 of them live beyond the barrier, and surveys indicate that many would leave. If they did, others might follow voluntarily.

“We did a survey three years ago and again last year, and the results were the same,” said Avshalom Vilan, a Parliament member from the left-wing Meretz Party. “Half the settlers beyond the barrier are ideologically motivated and do not want to move. But about 40 percent of them are ready to go for a reasonable price.”

I wonder how they define reasonable price. Enough to buy a comparable house in Israel? Part of the allure of the West Bank in the first place was to get cheaper housing. Or are the houses there selling for less than they paid to get them?

Even if the 40% were given buy-outs I do not think this would lead to a full Israeli withdrawal. If one type of people leave an area that just makes the area more like the type of people who won't leave. The West Bank Israelis will become more ideologically committed and others like them will move to join them.

By Randall Parker 2008 November 15 06:49 PM  MidEast Arabs Versus Israelis
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2008 November 13 Thursday
Hank Paulson On Imbalances As Economic Crisis Causes

US Treasury Secretary Hank Paulson discusses some ways to fix the financial system but also addresses imbalances that led to the crisis.

And to adequately reform our system, we must make sure we fully understand the nature of the problem which will not be possible until we are confident it is behind us. Of course, it is already clear that we must address a number of significant issues, such as improving risk management practices, compensation practices, oversight of mortgage origination and the securitization process, credit rating agencies, OTC derivative market infrastructure and regulatory policies, practices and regimes in our respective countries. And we recognize that our financial institutions and our markets are global, but our regulatory regimes are national, so we will examine how best to improve cooperation and information sharing to foster global financial system stability.

Paulson says global imbalances caused the capital market distortions that led to our unfolding financial disaster.

But let us not forget one fundamental issue which lies at the heart of our problems. Over a period of years, persistent and growing global imbalances fueled a dramatic increase in capital flows, low interest rates, excessive risk taking and a global search for return. Those excesses cannot be attributed to any single nation. There is no doubt that low U.S. savings are a significant factor, but the lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe have also fed the imbalances.

But why did the US savings rate plummet? My take: Low US savings are in large part a result of high Asian savings. The mechanisms that Asian governments used to reduce domestic consumption and to accumulate US debt caused distortions in the US monetary system and economy. The Asians - especially China - effectively kept US consumer prices down by buying US debt and keeping their currencies weak against the US Dollar. The Federal Reserve was therefore able to pursue an overly expansionary monetary policy without the warning flag of consumer price inflation. Instead the excess expansion of the US monetary supply expressed itself in asset price inflation.

Paulson wants to address the global imbalances. But governments of some other nations might continue to resist US efforts to close the US trade deficit.

If we only address particular regulatory issues – as critical as they are – without addressing the global imbalances that fueled recent excesses, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitality going forward. The pressure from global imbalances will simply build up again until it finds another outlet.

I expect the pressures from the global imbalances to build up again because so far I hear little from the bulk of our elites that indicate they understand the importance of fixing the causes of the problem. In fact, the priority in Washington DC is to reflate the bubble as quickly as possible. They seek to curtail the short term pain and help people who can't afford the houses to keep those houses. Yet we need prices to fall from their bubble levels.

As long as the housing price-to-rent remains above historical norms and the ratio of housing prices to income remains above historical norms we haven't reached sustainable prices in the real estate market. We should not reflate housing prices when housing prices are clearly distorted by reckless and destructive lending practices.

By Randall Parker 2008 November 13 11:14 PM  Economics Credit
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2008 November 12 Wednesday
Economic Depression Starting?

John Thain, chairman and CEO of Merrill Lynch, says the US economy is contracting like in 1929.

“Right now, the US economy is contracting very rapidly. We are looking at a per­iod of global slowdown,” he told investors. “This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slow­down we’re seeing now.”

86 year old former Goldman Sachs chairman John Whitehead says he expects a depression.

"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." Whitehead encountered plenty of crises during his 38 years at the investment banking firm and was a young boy during the 1930s.

These men are not marginal fringe nutcases. But are they correct? Can't the US Federal Reserve reflate the economy by doing massive buying of financial assets?

The CEO of JPMorgan Chase expects the worst is yet to come.

Nov. 12 (Bloomberg) -- JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the U.S. recession ``could be worse'' than the credit-market crisis that brought lending to a standstill.


Still, Dimon said there is reason for optimism about prospects for the economy. ``We're not running this company like we have a Great Depression,'' he said. JPMorgan continues to invest in businesses that benefit clients, including advisory work and raising money for corporations, he said.

But the chief of Britain's central bank only sees a downturn as bad as happened 30 or years ago.

The British economy faces its toughest year in almost three decades, the Governor of the Bank of England said yesterday. Mervyn King gave warning of “very difficult times” ahead and an even sharper recession than that of the early Nineties.

A survey of economists predicts a 4Q 2008 economic contraction rate of 3% followed by 1.5% contraction in 1Q 2009.

The implosion of credit markets last month will cause the economy to shrink at a 3 percent annual rate in the fourth quarter and decline at a 1.5 percent pace in the first three months of 2009, according to the median estimate of 59 economists surveyed Nov. 3 to Nov. 11. Following last quarter's 0.3 percent drop, the slump would be the longest since 1974-75.

``The economy fell off a cliff in October,'' said Richard Berner, co-head of global economics at Morgan Stanley in New York. ``We had a huge financial shock that intensified the credit crunch and triggered a sharp downturn.''

Goldman Sachs sees an even faster contraction: 3.5% followed by 2%.

The economy will shrink 3.5 percent in the fourth quarter and 2 percent in the first quarter, compared with previous estimates of 2 percent and 1 percent, Goldman economists led by Jan Hatzius wrote in a research note today. That would be the biggest back-to-back quarterly contraction since the start of the second year of Ronald Reagan's presidency.

By Randall Parker 2008 November 12 07:54 PM  Economics Business Cycle
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2008 November 10 Monday
US Health Care Cost Rise Not Sustainable

Princeton U economist Uwe E. Reinhardt argues that if family medical costs continue their over 8% per year increase of recent years their total medical costs will become unsustainable.

To return to our family with an assumed gross wage base of $60,000: If that gross wage base grew by, say, 3 percent per year over the next decade, to $80,600 by 2017, while total family health spending grew by, say, 8 percent per year over the same time frame, to $33,700 by 2017, then about 41 percent of the family’s gross wage base would be taken up by health care alone, before any deductions for taxes or fringe benefits. If the wage base grew by 4 percent, health spending still would absorb about a third of the family gross wage base.

The assumed gross wage base includes all costs paid by an employer for an employee including medical insurance, taxes, and assorted benefits. He's assuming a lower middle class family with two wage earners. Obviously this upward trend in medical costs is not sustainable.

In the short run the Democrats are going to vote in more medical benefits for poor people, starting with more government funding for medical insurance for children. But we also have the problem of retiree health care the costs of which will soar due to more retirees and more medical treatments. The political fight for maintaining the promised benefits for the old folks already will push taxes up so high that living standards for those still working will take a big hit.

Obama's planned tax increase won't even erase the current huge deficit, let alone provide the money for his plans for higher spending on health, education, and other areas.

Financial limits will usher in health care rationing. Long lines and eligibility rules will become more common. The biggest question: how much of the population will be allowed to pay for quick and highly advanced care?

My biggest worry: price controls on new treatments. Price controls would greatly slow the development of new treatments.

By Randall Parker 2008 November 10 08:48 PM  Economics Health
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Free Trade With Colombia To Save Auto Industry?

Lower trade barriers with Colombia or crash goes the US auto industry.

WASHINGTON: The struggling auto industry was thrust into the middle of a political standoff between the White House and Democrats on Monday as President-elect Barack Obama urged President George W. Bush to support immediate emergency aid.

Bush indicated at the meeting that he might support some aid and a broader economic stimulus package if Obama and congressional Democrats dropped their opposition to a free-trade agreement with Colombia, a measure for which Bush has long fought, people familiar with the discussion said.

I think Bush should show his support for Colombia by moving there. Adios Jorge Bush.

By Randall Parker 2008 November 10 08:44 PM  Politics Money
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2008 November 09 Sunday
Washington Post Admits Obama Bias

Usually the liberal press denies its overwhelming liberal bias. But in a rare bit of honesty on this subject Washington Post ombudsman Deborah Howell admits the her paper's uneven handling of Obama and McCain.

The op-ed page ran far more laudatory opinion pieces on Obama, 32, than on Sen. John McCain, 13. There were far more negative pieces (58) about McCain than there were about Obama (32), and Obama got the editorial board's endorsement. The Post has several conservative columnists, but not all were gung-ho about McCain.

Stories and photos about Obama in the news pages outnumbered those devoted to McCain. Post reporters, photographers and editors -- like most of the national news media -- found the candidacy of Obama, the first African American major-party nominee, more newsworthy and historic. Journalists love the new; McCain, 25 years older than Obama, was already well known and had more scars from his longer career in politics.

The number of Obama stories since Nov. 11 was 946, compared with McCain's 786. Both had hard-fought primary campaigns, but Obama's battle with Hillary Rodham Clinton was longer, and the numbers reflect that.

McCain clinched the GOP nomination on March 4, and Obama won his on June 4. From then to Election Day, the tally was Obama, 626 stories, and McCain, 584. Obama was on the front page 176 times, McCain, 144 times; 41 stories featured both.

Before McCain ran for the Presidency and even while McCain was trying to win the Republican nomination McCain was the press's favorite Republican. This should have been a tip-off to Republicans that McCain is to the Left of much of the party. Once McCain clinched the nomination the press's interest swung clearly toward attacking him and puffing up Barack Obama.

In this particular case of press bias I can't say I'm angry since I do not like McCain and think he would have made a bad president. Plus, the Republican leaders needed to be punished for their many bad decisions while in power. The big downside: Obama will probably be more willing to push immigration amnesty thru than McCain would have been. I think the backlash from the Republican base against the last time McCain and Bush tried to push thru amnesty made McCain decide to think twice about pushing it thru even though he's for it.

By Randall Parker 2008 November 09 03:38 PM  Media Critique
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Massive Deficit Will Not Stop Obama Welfare State Expansion

The massive federal deficit which George W. Bush, a spendthrift Congress, a financial crisis, and recession leave Barack Obama is not enough to restrain his spending plans. New health care entitlements are part of Obama's plan.

Mr. Obama repeated on Saturday that his first priority would be an economic recovery program to get the nation’s business system back on track and people back to work. But advisers said the question was whether they could tackle health care, climate change and energy independence at once or needed to stagger these initiatives over time.

The debate between a big-bang strategy of pressing aggressively on multiple fronts versus a more pragmatic, step-by-step approach has flavored the discussion among Mr. Obama’s transition advisers for months, even before his election. The tension between these strategies has been a recurring theme in the memorandums prepared for him on various issues, advisers said.

Obama needs to move to the Left of George W. Bush. Given Bush's record on domestic spending that's a tall order. But Obama is up to the task. Increasing educational spending has done little to improve outcomes. Yet to admit the futility of trying to improve academic performance would require the admission of ugly truths. Can't have that. So Obama will boost educational spending on top of Bush's educational spending increases.

The economic crisis will not prevent Obama from pursuing the priorities he outlined on the campaign trail, said John Podesta, co-chair of Obama's transition team.

These include extending heath care to the nation's 47 million uninsured, reducing U.S. reliance on foreign oil, and improving public education, Podesta said.

"These are all core, if you will, economic questions and they need to be tackled together, and I think you'll have a program, and a strategy to move aggressively across all those fronts," Podesta said on CNN's "Late Edition."

We are still going to live in Warren Buffett's Squanderville under Obama just like under Bush and Clinton. Thriftville will come out of necessity, not due to political decisions to embrace it.

If you live in California and need a low mpg vehicle best to get one before they get pulled off the market.

The president-elect has also said he intends to quickly reverse the Bush administration's decision last December to deny California the authority to regulate carbon dioxide emissions from automobiles.

By Randall Parker 2008 November 09 03:06 PM  Politics Redistribution
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2008 November 08 Saturday
GMAC Puts High Bar For Car Credit Applicants

The General Motors Acceptance Corporation (GMAC) has raised its lending standards for auto loans. As a result at least 40% of the population of the state of California have credit scores too low to qualify for an auto loan from GMAC.

GMAC said it will now only lend money to buyers with credit scores better than 700, near the top. It's also financing a smaller portion of the car's value, requiring buyers to make bigger down-payments.

"Scores under 700, that's at least 40% of the population of this state," California New Car Dealers' president Welch told CNNMoney.

What I would like to know: the credit rating distribution of the population of each American state and the trends for credit rating distribution per state. What will credit ratings look like 10, 20, 30 years from now? I'm expecting a decline in average credit ratings for demographic reasons. Whites who have higher average credit scores are a declining percentage of the population. Whereas blacks and Hispanics who have lower average credit scores are rising fractions of the US population. What does this portend for future car sales?

By Randall Parker 2008 November 08 01:45 PM  Economics Transportation
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2008 November 06 Thursday
Schwarzenegger Proposes Higher California Sales Tax

California already features high tax rates along with a large welfare state and a lower class expanding as a result of immigration. The economic downturn has made California's continual fiscal crisis even worse to the point that Governor Schwarznegger has proposed a sales tax increase that will, combined with local sales taxes, put the sales tax over 10% in some areas.

A temporary 1.5 percent sales tax increase proposed Thursday by Gov. Arnold Schwarzenegger to deal with the state's worsening fiscal crisis comes just two days after Marin voters approved a quarter-cent sales tax increase for passenger rail service.

In San Rafael, it would push the sales tax to 10 percent.

First they take money out of your paycheck. Then they take more money when you go to spend what they let you keep. I thought Europe exists so that people who want to pay high sales taxes have a place to go do that. Do we really need California to serve that purpose for masochists too?

The California budget deficit has soared again as the financial crisis cut tax revenues.

Schwarzenegger, who proposed the tax hike along with another $4.5 billion in spending cuts during a news briefing, said he has little choice: Just six weeks after signing an overdue state budget intended to close a $15.2 billion deficit, the state faces an $11.2 billion deficit.

The shortfall was only $3 billion less than a month ago. California has a 7.7% unemployment rate with only 3 other states worse.

The budget gap has grown from $3 billion the state estimated when it sold $5 billion of short-term notes Oct. 16. That deficit figure was based on tax revenue projections through September and didn't anticipate projected shortfalls in October.

If you are a Californian who is thinking about getting expensive work done on your car then do it now before prices go up.

In addition to raising the sales tax, Schwarzenegger is proposing expanding its scope to include some services such as vehicle, appliance and furniture repair.

Veterinary services too. Better get Fido's teeth cleaned in December before the tax goes in effect on January 1.

Living standards will take a hit.

Based on the governor's figures, a 11/2-cent sales tax increase would cost the average California household about $300 annually, although the actual amount is likely to be less because of spending by businesses and tourists.

This is a scene of coming attractions for the nation as a whole. Retiring baby boomers combined with growing numbers of low skilled Hispanics will cut tax revenue while boosting demand for government hand-outs and services. We face higher taxes in our future.

Most of the new budget gap opened up in the last few weeks.

The latest estimate of the budget deficit for the current fiscal year, which ends June 30, is nearly four times larger than what the state Department of Finance estimated a month ago.

In California's legislature a supermajority (two thirds) is required to vote tax increases. If the California constitution ever gets amended to remove that supermajority requirement then the taxes will hit the stratosphere. As it stands now the dwindling Republican ranks in the legislature have managed to block most attempts by the Democrats to raise taxes.

Schwarzenegger's call for tax increases puts him again at odds with legislators in his own party. Republicans, a minority in both houses but strong enough to block spending plans, were steadfastly against raising taxes in the last budget, and the state Senate's GOP caucus chairman said that won't change.

But the decline of the white population and the rise of the Hispanic population will eventually make the Republican position in the legislature too small to hold back big tax increases. Those coming tax increases will accelerate the flight of productive people out of California.

By Randall Parker 2008 November 06 10:03 PM  Politics Redistribution
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Irresponsible Spendthrift Voters

Steve Sailer criticises the California initiative process as spendthrift voters show themselves just as irresponsible as politicians who buy votes with pork.

Every year in California, we get to vote on about a dozen initiatives, most of which we voters are completely clueless about. I'm not talking about the much publicized gay marriage one -- everybody is entitled to an opinion on that. It's all the bond issues. Shall we issue $10 billion in bonds for a supertrain from LA to SF? How about $7 billion to removes asbestos from LA schools? (I think they both passed. I'm too depressed to look them up.)

Sure, why not? They're bonds, right, not taxes? So we won't have to pay them. I guess, theoretically, we're supposed to pay them sometime, but no doubt we'll just flip the state to a greater fool before that happens.

Obviously, the initiative system is broken. The state is completely broke, with a predicted illegal shortfall of $25 billion next year in the state budget. Yet voters are continuing to take on debt with no idea how it will be paid. This is the state that sank the world economy. We're too childish to have that kind of spending power.

We hear a lot of criticism lately of irresponsible financial institutions. But what about irresponsible voters? California's voters just went on another spending spree.

Voters in California narrowly approved a $9.95 billion bond issue for high-speed rail, okayed $980 million for projects at children's hospitals, and gave the nod to $900 million for a veterans mortgage program. In Los Angeles, voters approved a $7 billion facilities bond issue for the Los Angeles Unified School District with nearly 70% of the vote, easily eclipsing a 55% requirement, as well as a $3.5 billion measure for the Los Angeles Community College District.


California voters approved three separate state general obligation bond authorizations, including the largest, a $9.95 billion authorization to finance a high-speed passenger trains system. They rejected a $5 billion bond measure that would have financed rebates for buyers of a variety of alternative-fuel vehicles.

In Los Angeles County, 67% of voters approved a half-cent sales tax that will raise $30 billion to $40 billion to fund light rail, subway and other transit projects over the next 30 years. The Los Angeles County Metropolitan Transportation Authority hasn't yet said how much it will spend on a pay-as-you-go basis versus bond financing.

Voters approved $2.1 billion of GOs for the San Diego Unified School District with 69% of the vote. In Long Beach, voters approved a $1.2 billion GO bond measure for the Long Beach Unified School District.

San Francisco voters overwhelmingly approved an $887 million GO bond measure to rebuild San Francisco General Hospital, giving the measure 79% of the vote. Santa Clara County voters gave their public hospital, the Santa Clara Valley Medical Center, 78% support in an $840 million GO bond referendum.

The East Bay Regional Park District passed a $500 million open space bond with 71% of the vote.

Schools and trains bring out the profligacy in California voters.

Steve wants to put limits on how much money an initiative can spend. But the problem here goes deeper than the initiative system. Democracy is broken. While democracy is becoming more broken the idea that democracy will break in this way goes all the way back to Aristotle in his "The Politics volume 1": The many poor can abuse power and use democracy to plunder just as much as the tyrant can in a dictatorship.

Yet another question: Who ought to have the supreme authority in the state? The many,—the wealthy,—the tyrant,—the good,—the one best man? Any of these alternatives may lead to bad results. If the poor rule, they may divide the property of the rich. Is not this unjust? ‘Nay,’ will be the reply, ‘the people did it.’ But if they go on and on, the poor majority dividing by force the wealth of the rich minority, the state will be ruined. And on the same principle the rich or the tyrant may rob the poor. Yet surely justice is the preservation and not the destruction of states. The people, if they plunder the rich, are no better than the tyrant; both make might prevail over right. ‘But ought not the good to rule?’ Then a slight will be put upon everybody else. ‘Or the one best man?’—that will make the number excluded still larger. Or, shall the law, and not the will of man, have the supreme power? And what if the law be defective?

Here is another variation on Aristotle's look at the unjust poor fleecing the rich. You can find more great passages in classical Western books in the Liberty Fund's Online Library of Liberty.

By Randall Parker 2008 November 06 08:12 PM  Democracy Failure
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2008 November 03 Monday
Restrict Voting Rights To Net Taxpayers?

Roissy argues that the voting privilege should be restricted to people who pay more in taxes than they receive in benefits. I agree. But how to get such a change implemented?

Voting is a useless exercise. Your one vote will not change the result of a national election. Get over yourself.

If you wear an “I voted” sticker tomorrow, you are a status whore. And you can be bought cheap.

I support limiting the right to vote to net taxpayers and taking it away from net tax-recipients.

How to get such a change in the voting privilege implemented when the net tax recipients probably outnumber the net taxpayers?

By Randall Parker 2008 November 03 11:19 PM  Politics Voting
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McKinsey: Baby Boomers Need To Work 2 Years Longer

A McKinsey report finds that Baby Boomers need to work longer or suffer a big decline in living standards once retired.

The twilight of the US baby boom generation is approaching, and with it deep, structural economic shifts whose impact will be felt for decades to come.1New research from the McKinsey Global Institute (MGI) shows that there is only one realistic way to prevent aging boomers from experiencing a significant decline in their living standards and becoming a multidecade drag on US and world economic growth. Boomers will have to continue working beyond the traditional retirement age, and that will require important changes in public policy, business practices, and personal behavior. These adjustments have become even more urgent with the recent financial turmoil, which has sharply reduced the home values and financial investments of millions of boomers just as they approach retirement.

Underlying the need for change is a reversal of trends that have been in operation since the 1960s. For decades, boomers swelled the ranks of the US labor force, driving up economic output as they earned and consumed more than any other generation in history. Now, as the boomers age and retire, US labor force participation rates are declining. Without an unexpected burst of productivity growth or a significant upsurge in investment per worker, the aging boomers’ reduced levels of working and spending will slow the real growth of the US GDP from an average of 3.2 percent a year since 1965 to about 2.4 percent over the next three decades. That long-term growth rate is 25 percent lower than the one the United States and the world have long taken for granted.

I think this is just one of the reasons American economic growth will slow.

MGI research highlights a further problem: two-thirds of the oldest boomers are financially unprepared for retirement, and many are not even aware of their predicament.2 This lack of sufficient resources will not only mean a less comfortable retirement for tens of millions of households but also depress spending in the overall economy.

Yet the boomers’ retirement need not be such a major dislocation. We estimate that a two-year increase in the median retirement age over the next decade would add almost $13 trillion to real US GDP during the next 30 years while cutting roughly in half the number of boomers who would be financially unprepared for retirement.

Our research shows that many boomers actually do want to continue working. Nonetheless, a number of institutional and legal barriers—health care costs, labor laws, pension regulations, and corporate attitudes toward older workers—could prevent them from prolonging their careers. Overcoming these barriers will require the government to reallocate health insurance costs for older workers, businesses and boomers to agree on more flexible work arrangements, policy makers to reform private pensions, and Social Security to remove disincentives to remaining in the workforce.

Some of those corporate attitudes toward older workers are, unfortunately, quite rational. Older workers have more physical disabilities and are less able to learn and remember. Aging brains lower productivity. We really need oligodendrocyte cell therapy to repair our aging myelin sheaths and reverse at least part of brain aging.

They see declining labor force participation as a cause of slower economic growth. That's incredibly important. A more rapidly expanding economy will generate more tax revenues at lower tax rates. A slower economy will require much higher taxes to meet the same entitlements commitments.

Labor force participation has declined to 66 percent today and is headed, according to our research, toward 60 percent by 2035—a level not seen since the 1960s. If labor productivity and capital growth continue on current trends, declining labor force participation will knock real GDP growth down to 2.6 percent from 2007 to 2016, to 2.4 percent from 2017 to 2026, and to 2.2 percent from 2027 to 2035. A slowdown of this magnitude would represent a structural shift for the US economy and leave it with growth rates typical of Europe’s in recent decades.

The labor force problem is even worse than that because of other demographic changes to the American workforce. Academic performance is on the decline. More schooling isn't helping. This problem will not improve with time.

By Randall Parker 2008 November 03 09:37 PM  Economics Demographic
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2008 November 02 Sunday
Current Financial Crisis Small Compared To What's Coming

David M. Walker, former Comptroller General of the U.S., argues that the current financial crisis is small potatoes compared to the coming unfunded entitlements US financial crisis.

At the dawn of the 21st century the U.S. had $5.7 trillion in total debt. As we approach the end of George W. Bush's presidency only eight years later, that sum has nearly doubled, thanks to war costs, tax cuts, spending increases, expanded entitlement programs, and now a welter of government bailouts and rescues.

This year was particularly bad. The federal budget deficit for fiscal 2008 hit $455 billion, up from $162 billion last year. That figure does not include the cost of the Emergency Economic Stabilization Act of 2008, which has an initial pricetag in the hundreds of billions of dollars. In fairness, some of that money presumably will come back to the Treasury, since the new rescue-related sums will be used to acquire preferred stock, mortgages, and other assets that someday could be sold at a profit.

Yet any such calculations are penny ante compared with the fiscal disaster that is bearing down on America.

The US old age entitlements are underfunded.

The U.S. Government Accountability Office (GAO), noting that the federal balance sheet does not reflect the government's huge unfunded promises in our nation's social-insurance programs, estimated last year that the unfunded obligations for Medicare and Social Security alone totaled almost $41 trillion. That sum, equivalent to $352,000 per U.S. household, is the present-value shortfall between the growing cost of entitlements and the dedicated revenues intended to pay for them over the next 75 years.

Do not plan on retiring at age 65. Here's why:

Today we are headed toward debt levels that far exceed the all-time record as a percentage of our economy. In fact, by 2040 we are projected to see debt as a percentage of our economy that is double the record set at the end of World War II. Based on GAO data, balancing the budget in 2040 could require us to cut federal spending by 60% or raise overall federal tax burdens to twice today's levels.

My guess is that the problem is much bigger than Walker expects. Calculations of the size of the unfunded liability are based on assumptions about future economic growth. These assumptions seem excessively optimistic for a couple of reasons. First off, Peak Oil is coming. That's going to cut into per capita GDP and cause the US economy to shrink for several years. Second, the aging of the US population is not the only large demographic crisis we face. Poorly performing Hispanic immigrants will cause declining per capita income in California The economy in Texas will become more like the Third World as well. The lagging groups will not get better with time. So declining per capita GDPs seem inevitable - at least until either artificial intelligence or genetic engineering overwhelm this trend. The libertarian view of immigration is deeply flawed. This means that the leftist welfare state and the libertarian dreams for a smaller government will both take big hits. So will your living standard. Plan and work accordingly.

By Randall Parker 2008 November 02 01:00 PM  Economics Demographic
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How To Buy Health Care Insurance?

Had John McCain won the presidency he would have pushed a health care reform that probably would have reduced employer-provided medical insurance. That seems like a bad idea at this point.

The concept of letting people shop for insurance across state lines applies to the individual health insurance market, which now serves about 17 million people. The market consists largely of those without access to insurance through their employers, but it's a market McCain is trying to strengthen through changes in the tax code. Under his plan, people would get the same tax break — a $2,500 credit for individuals or a $5,000 credit for families — regardless of whether they got insurance coverage through work or purchased it directly.

Now, tax breaks primarily help those with employer-sponsored coverage. Employer and employee payments toward health insurance are excluded from income and payroll taxes. McCain would treat those payments as taxable wages and an income tax would be applied to them for the first time.

Polling conducted by the Kaiser Family Foundation suggests people feel a good deal of attachment to getting their insurance through employers. About 61 percent of those surveyed felt that shopping on their own would make it harder to find a plan that meets their needs; only 15 percent said it would be easier. In addition, 81 percent of respondents thought it would be harder to get a good price for their health insurance if they were to buy health insurance on their own.

Certainly it is unfair in the United States that employees can get health insurance in pre-tax dollars while the self-employed must pay for health insurance in post-tax dollars. But group purchasing of medical insurance by employers is more efficient and I do not think it should be discouraged. McCain's proposal would probably reduce the number of employers who provide medical insurance by making the benefit taxable. So this seems like a step in the wrong direction. Better to just make medical insurance costs tax-deductible for the self-employed.

Some see that tax deductibility as an interference in the free market. After all, why should a particular type of spending be favored by tax law? Well, I can think of a few reasons. Most obviously, if people do not buy medical insurance and they get seriously ill a large part of the electorate will favor taxing us to pay for the medical costs of the uninsured. That already happens today. Also, sick people are not productive people and so they earn less and pay less in taxes. This creates burdens for the rest of us. We are better off with a healthier population.

But even a change in the law to allow deductibility of health insurance would not cause most of the uninsured to become insured. There are a few reasons for that. First off, some people who can afford health insurance would rather spend their money on more immediately gratifying purchases. Second, some make so little money that they can't afford health insurance. This is, parenthetically, a really strong argument against letting in millions of low skilled Mexican and Central American immigrants. They just make our growing huge medical cost problem even bigger.

Third, one of the biggest problems with employer-provided health insurance is also a problem with self-purchased health insurance: Unemployed people can't afford it. Seems to me we need a way to pre-buy medical insurance. Either that or have a way to accumulate cash pre-tax to use to buy health insurance when not employed. Tax-advantaged Health Savings Accounts are a big step in that direction. But most people are getting whatever their employer provides and even HSAs still have a monthly premium for each current month's health insurance. The HSA cash is mostly for the costs not covered by the insurance.

The problem of unaffordable health care keeps getting bigger.

Oct. 23, 2008 -- Workers' health insurance premiums have shot up more than five times faster than their wages since 2000, adding to an increasingly tight squeeze on family budgets, according to a report released Thursday by a health care consumer group.

The report shows that the average cost of family coverage in the workplace went from $6,672 in 2000 to $12,078 in 2007. That's more than a 78% rise. But at the same time, average wages rose about 15%, according to Families USA, a left-leaning advocacy group.

"People who used to take health care coverage for granted no longer can do so, and they are at growing risk of joining the ranks of the uninsured or underinsured," says Ron Pollack, the group's president.

We need automation of health care delivery. What funding model would most accelerate that automation?

By Randall Parker 2008 November 02 09:34 AM  Economics Health
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