Friday, April 29, 2011

Debt Limit Fear Mongering

“The debt limit is coming! The sky is falling!” Or maybe a more apropos parable is the boy who cried wolf.

Much of what we’re being told about having to increase the debt limit doesn’t make sense. Here are some rather obvious questions that need to be considered regarding the debt limit:

• If you can raise the limit whenever it becomes a limit, what’s the point?

• If not raising the limit would be catastrophic, is it possible to have a limit? If adhering to the limit creates havoc, is it even an option?

• How will not raising the limit result in default? Doesn’t it simply mean that from that point on, your current expenditures cannot exceed your current revenue?

The limit doesn’t even mean you cannot issue new bonds to replace maturing ones. It just means you can’t increase the total amount of outstanding indebtedness. It does not mean that all federal government payments of any kind must stop immediately, as former treasury secretary Alice Rivlin has claimed. There might well be some explanation for the debt limit-default connection, but it is anything but obvious.

When you reach the limit, you basically have three choices — decrease spending, raise taxes, or raise the limit. Have we already reached the point where there are zero discretionary expenditures? Are there no purchases that can be canceled or at least postponed? Are there no positions that can be eliminated or at least left unfilled?

The first federal debt limit was imposed in 1917. It has been raised an average of every fifteen months since then, including eleven times in the past fourteen years.

If the limit can be raised more or less at will, is it a complete joke? No, it’s only a 90 percent joke. In the current iteration of the dance, for example, Republicans hope to use it as leverage to extract spending limitations from the Democrats.

According to H.L. Mencken, “The whole aim of practical politics is to keep the populace alarmed — and hence clamorous to be led to safety — by menacing it with a series of hobgoblins, all of them imaginary.” Fear mongering is part of a politician’s DNA, but lately it has been resorted to in unprecedented levels.

We were told in 2008 that the Troubled Asset Relief Program (TARP) had to be passed in a matter of hours or days or financial Armageddon would surely follow. In retrospect, that is very much in doubt, to put it mildly. TARP probably caused more damage than it prevented.

The stimulus package was rushed though in the first two weeks of the Obama presidency, again under the guise that we had little choice and no time to debate. We were told that passing the stimulus bill would be the only way to prevent the unemployment rate from exceeding 8 percent. The stimulus bill passed, government spending exploded, and the deficit shot up. Nevertheless, the unemployment rate went well above 8 percent and has remained there.

The stimulus has definitely not lived up to its official title — the American Recovery and Reinvestment Act. Two and half years after it was passed, there is no “American Recovery” in sight. We are living through what is by far the longest recession in the nation’s history.

Once again we’re hearing the same calamitous warnings of impending disaster if we don’t put aside our skepticism and just put our trust in the authorities in Washington, D.C. and on Wall Street. Have they earned our trust? What has been their track record?

There are indications that the scare tactics aren’t working like they used to. A New York Times poll last week asked, “Do you favor or oppose raising the debt limit?” Only 27 percent said they were in favor versus 63 percent who were opposed. The results did not change much when the question was followed up with the possibility that a limit might increase interest rates.

Having a debt limit is not the problem. It is only a symptom, or even a symptom of a symptom. Spending beyond our means is the problem.

A budget is one of the most basic and widely used tools of human action. It is a highly useful method for dealing with reality. Failing to face facts about a budget is the same as running away from reality. The simplest and most common budget rule is to balance income with spending. There’s nothing wrong with temporary imbalances, but any serious observer knows that permanent deficits are an invitation to disaster.

Those who argue it’s too soon for the government to live within its means are like a drunk who says he couldn’t possibly sober up unless he first gets another drink. The debt limit is a little bit like an “intervention.”

Everyone admits that the debt limit will once again be raised. Nevertheless, the fact that it has become such a hot issue this time is a good omen. The public, at least, appears ready to get serious.

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Debt Limit Fear Mongering April 28, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Tuesday, April 12, 2011

California Descends Deeper Into Self-Destruction

California — it’s the best place to live and it’s the worst place to live. The physical climate is almost ideal and the political climate, if you’re a conservative, is surreal. Through their politicians and bureaucrats Californians seem hell bent on destroying the state’s vast potential. It’s a painful sight to witness.

The latest, all too typical, example is a law signed by Governor Jerry Brown last week mandating new renewable energy requirements for electric utilities in the state. The new law requires that 33 percent of electricity generated be done with “renewable” sources, essentially wind mills and solar panels, by the end of the year 2020. What’s the objective of this “ambitious” new regulation?

To answer that question you first need to understand that California has a wildly inflated sense of self-importance. Californians actually believe they have the ability and duty to save the planet. Humility is clearly not their strong suit.

California has a population of roughly 37 million. That is barely half of one percent of the world’s population. If Californians reduce their “carbon footprint” by a third (a very tall order), that will reduce humanity’s carbon footprint by one sixth of one percent. I hate to tell my fellow Californians, but there is no way on earth that will make an iota’s worth of difference.

Some Californians will point out, however, that that misses the point. Because they think California is the center of the universe, what happens here will change behavior and attitudes throughout the world. California is a place where self-esteem has run amok.

At the signing ceremony Governor Brown said, “It’s about California leading the country. It’s America leading the world. There are people who think we can drill our way to happiness and prosperity. Instead of taking oil from thousands of miles away, we’re taking the sun and converting it.” Brown went on to say quite proudly, “I didn’t get my name ‘Governor Moonbeam’ for nothing.”

A recent Public Utilities Commission study found that previously imposed renewable energy regulations have added $6 billion to what utilities have had to spend generating electricity since 2002. Has there been any measurable or identifiable benefit for spending that unnecessary $6 billion? The benefit-cost ratio of those expenditures is a close to zero as it’s possible to get. This has been absolute folly and we are about to multiply it by who knows how much.

Such costs are even worse than increasing taxes. Taxes at least have the potential to create value when spent on, for example, teachers’ salaries. Taxes redistribute wealth, mandates destroy wealth.

When the utilities are forced to buy several times more power generated by windmills and solar panels, the price is bound to go through the roof. Not to worry, however. The new law further requires the utilities commission to place limits on how much can be spent on renewable power. When one kind of coercion isn’t enough, follow up with another kind of coercion. Of course, the only real result of a price ceiling is to create shortages. Shortages do even more economic damage than rising prices. Keep passing laws until the entire economy is in a straightjacket. One interference with the market always necessitates another, as Fredrich Hayek demonstrated long ago in The Road to Serfdom.

As is usually the case (Obamacare, for example), the spineless lawmakers left the ugly details to the bureaucrats. According to public utilities commissioner Mike Florio, “Our staff is already figuring out what we’ll need to do. It’s clearly a priority for the state, so we’ll get it done as fast as possible.” The politicians and the bureaucrats have not the vaguest idea what they’re doing. They know nothing about what’s involved in providing electricity to the state’s residents and businesses, and they don’t really see why they need to.

The legislation demonstrates the liberal faith in and willingness to use force. The assumption is that solar panels and windmills can suddenly increase their output just because a law has been passed. It’s not that simple. The politicians have no more understanding about how technology works than they do about how the economy works.

If it’s California’s responsibility to save the world, and if force works, why such a modest target? Why not, for example, a 100 percent renewable requirement by 2015? The 33 percent mandate by the end of 2020 is totally arbitrary. How was it arrived at? When you’re operating in a realm where costs don’t matter and objectives are utopian, numbers are a mere afterthought. The targets are unlikely to be achieved even after billions of dollars have been squandered. According to Gino DiCaro, spokesman for the California Manufacturers and Technology Association, industry in California already pays electricity rates about 50 percent higher than the rest of the country. That, of course, is one of the reasons for the exodus of businesses from the state.

Although California politicians fail utterly in their basic responsibilities—balancing a budget, for example—they arrogantly believe they can save the planet. Their attitude is, “We can’t possibly focus on the state’s economy. We’re too busy stopping global warming!” Just as they recklessly overpromise on government-employee pensions, they overpromise on their ability to cure the world’s maladies.

In a spot-on Wall Street Journal column last year entitled “California: The Lindsay Lohan of States,” Allysia Finley (a former resident of California) pointed out that our government here is being “run by a brothel of environmentalists, lawyers, public-sector unions and legislative bums.” Her article followed the November elections that made California a one-party state. She said the state is like “a prima donna who once showed some talent but is now too wasted to do anything with it.” I fervently wish her words weren’t so true. As a resident of California, it breaks my heart to see the state’s vast potential being squandered. As an economist it pains me to see resources so grossly misallocated and wasted on such a massive scale.

I wish this self-destructive behavior were confined to California. Ominously, the renewable mandate signing ceremony was attended by U.S. Energy Secretary Steven Chu. It isn’t often a state-level bill signing is attended by a U.S. cabinet officer. The Obama administration obviously believes California’s lunacy is just what the rest of the country needs. God help us.

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California Descends Deeper Into Self-Destruction April 21, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

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