The Efficient Subsidize The Inefficient

Borrowing money becomes the only way to prop up the Status Quo, inevitably leading to insolvency

by Charles Hugh-Smith

Consider the consequences of the efficient subsidizing the inefficient. As long as the surplus generated by the efficient is larger than the cost of supporting the inefficient, the system can continue.

But once the cost of subsidizing the inefficient exceeds the surplus generated by the efficient, the system is doomed to eventual insolvency.

There is one way to fill the deficit, of course: borrow money. This is the strategy being pursued by the Status Quo in developed and developing economies alike.

Identifying the efficient and inefficient sectors is not straightforward, as everyone reports they are being highly efficient. Since most of the economy is controlled by the State (a monopoly) and its favored private monopolies/cartels, the market has few opportunities to exert competition.

How much competition is there in the higher education cartel or the sickcare (a.k.a. healthcare) cartels? Very little.

As long as the inefficient are protected from competition and amply subsidized, there are no incentives to become more efficient. In effect, becoming more inefficient is rewarded.

One broad measure of efficiency for nations which do not own the global reserve currency is trade. Nations with highly efficient sectors tend to export the products of those sectors, while nations with inefficient sectors tend to import more than they export. (Owning the reserve currency creates a unique situation I have discussed elsewhere: Understanding the "Exorbitant Privilege" of the U.S. Dollar November 19, 2012)

The Conservative Crisis

The GOP's only hope is to offer a real alternative after the inevitable overreach of liberal government

By PATRICK J. BUCHANAN

As the white flag rises above Republican redoubts, offering a surrender on taxes, the mind goes back to what seemed a worse time for conservatives: December 1964.

Barry Goldwater had suffered a defeat not seen since Alf Landon. Republicans held less than one-third of the House and Senate and only 17 governorships. The Warren Court was remaking America.

In the arts, academic and entertainment communities, and national press corps, conservatives were rarely seen or heard. It was Liberalism’s Hour, with America awash in misty memories of Camelot and great expectations of the Great Society to come in 1965.

That year, however, saw escalation in Vietnam, campus protests, and civil disobedience against the war. That August, there exploded the worst race riot in memory in the Watts section of Los Angeles, with arson, looting, the beating of whites, and sniper attacks on cops and firemen.

A year after LBJ’s triumph, black militants and white radicals were savaging the Liberal Establishment from the left, while Gov. George Wallace had come north in 1964 to win a third of the vote in the major Democratic primaries with an assault from the populist right.

Below the surface, the Democratic Party was disintegrating on ethnic, cultural and political lines. Law and order and Vietnam were the issues. Richard Nixon would see the opening and seize the opportunity to dismantle FDR’s coalition and cobble together his New Majority.

Today, the GOP strength in the House, Senate and governorships is far greater than anything Republicans had in the 1960s. The difference is that, then, we could visualize a new majority of centrist Republicans, Goldwater conservatives, Northern Catholic ethnics and Southern Protestant Democrats.

The charge of the anti-enlightenment brigade

Far from heralding a new dawn of reason, today’s New Atheists are at the vanguard of the counter-Enlightenment

by Michael Fitzpatrick 

I don’t know if many of you saw the Atheist Bus a few years ago. It toured around London for a while and on its side an advert read: ‘There’s probably no God. Now stop worrying and enjoy your life.’

I was reminded of this when I was reading a new book by Francis Spufford called Unapologetic: Why, Despite Everything, Christianity Can Still Make Surprising Emotional Sense. He asked the interesting question: what is the most objectionable word in that bus-side slogan? There was controversy in the humanist world about the ‘probably’; however, Spufford’s main objection was to the word ‘enjoy’ - ‘stop worrying and enjoy your life’. The point that Spufford made was that the underlying implication of this statement is that enjoyment is a natural state of affairs that’s only being disturbed by people being worried by preachers and believers - a point of view he briskly dismisses as complete bollocks. ‘Enjoy’ doesn’t really connect with a whole vast range of problems of human experience. That statement seems to be pitched to an idealised consumer. What would it mean to someone experiencing loss, bereavement, illness, death, indeed all the vicissitudes of life? It leaves people with no sense of any hope or consolation.

But the Atheist Bus was a great success. Beginning with a Guardian blog by Ariane Sherine – a reaction to evangelical Christian propaganda that claimed all non-believers were going to hell – it raised £144,000 in a fortnight and soon went global. The Atheist Bus is now, as you can see on the campaign website, in every country in the world, complete with a whole host of celebrity endorsements.

But here’s the question that interests me about this: the guy with the sandwich board saying ‘repent, the end is nigh’, that sort of religious propaganda, has been around all our lives. Why, suddenly, at this stage in history, has this become the focus of a major campaign among the thoughtful sections of society? Moreover, why does the campaign have such a shouty character?

What is wrong about the euro, and what is not

Hard money has a tendency to expose illusions

by DETLEV SCHLICHTER

Every Monday morning the readers of the UK’s Daily Telegraph are treated to a sermon on the benefits of Keynesian stimulus economics, the dangers of belt-tightening and the unnecessary cruelty of ‘austerity’ imposed on Europe by the evil Hun. To this effect, the newspaper gives a whole page in its ‘Business’ section to Roger Bootle and Ambrose Evans-Pritchard, who explain that growth comes from government deficits and from the central bank printing money, and why can’t those stupid Europeans get it? The reader is left with the impression that, if only the European states could each have their little currencies back and merrily devalue and run some proper deficits again, Greece could be the economic powerhouse it was before the Germans took over.

Ambrose Evans-Pritchard (AEP) increasingly faces the risk of running out of hyperbolic war-analogies sooner than the euro collapses. For months he has been numbing his readership with references to the Second World War or the First World War, or to ‘1930s-style policies’ so that not even the most casual reader on his way to the sports pages can be left in any doubt as to how bad this whole thing in Europe is, and how bad it will get, and importantly, who is responsible. From declining car sales in France to high youth-unemployment in Spain, everything is, according to AEP, the fault of Germany, a ‘foolish’ Germany. Apparently these nations had previously well-managed and dynamic economies but have now sadly fallen under the spell of Angela Merkel’s Thatcherite belief in balancing the books and her particularly Teutonic brand of fiscal sadism.

Blame it on ze Germans

The pending bankruptcy of France’s already semi-nationalized car industry is, of course, not to be blamed on high French taxes, strangling French labour market regulation, increasingly uncompetitive French wages, and grave business errors – French car companies have been falling behind their German rivals for years -, but the result of French ‘austerity’, which hasn’t even started yet and will culminate in – quote AEP, and drum roll please! – a ‘shock therapy’ next year of 2 percent. Mind you, France’s state has a 57% share in GDP, and the economy deserves the label socialist more than capitalist. Does France really need more state spending, or even unchanged state spending? Another government stimulus? I bet you could cut the French state by 10 percent instantly, and in a year or two you had faster growth, not slower growth!

The Terminator

A paean of praise to the humble cockroach

By Tim Price

“Our Russian psychosis has two curious features. Firstly, that an 80 per cent Christian Orthodox society for some reason reacts to a Mayan calendar which no one has ever seen. And secondly, that the end of the world is perceived as an economic crisis that can be survived on the banal level of consumption.”

Russian broadsheet ‘Vedomosti’, quoted in The Daily Telegraph last Friday in an article entitled ‘Russian residents buy up tinned goods and matches ahead of apocalypse’.

Speaking of apocalypse, there is an increasingly urgent debate occurring in what’s left of the financial markets over the stability of that mountain of government debt that sets its long shadow over everything. The mountain is not localised or restricted to any one region. As befits the current economic climate, it’s global in scale and intractable in structure. As Kyle Reese remarks of The Terminator in the film of the same name, the debt mountain,

“… is out there. It can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or fear. And it absolutely will not stop, ever…”

A bond fund manager makes the following comment on David Fuller and Eoin Treacy’s excellent Fullermoney strategy website:

“If this is a bond bubble it is the most widely anticipated ‘bubble’ I have ever seen; everyone is identifying it. A second point is that the debt de-leveraging process and time frame is not like emerging from a less leveraged recession. It is a pernicious and deflationary phenomenon. Witness that for all the stimulus the CBs [central banks] are throwing at the issue, it has been terribly hard to create growth, inflation or cause rates to rise. We are getting minimal aggregate GDP growth in the developed world even with historically unprecedented base money creation.

Bond in Bankruptcy

A Godzilla movie without the  happy ending

By mark steyn

For some reason, the quadrennial humiliation of the Republican presidential candidate now coincides with the release of the new Bond movie. Don't ask me why; probably a constitutional amendment I missed along the way. Last time round, Kevin Sessums interviewed Daniel Craig and, as a final question, asked which presidential nominee would make the better 007:

Craig doesn't hesitate. "Obama would be the better Bond because — if he's true to his word — he'd be willing to quite literally look the enemy in the eye and go toe to toe with them. McCain, because of his long service and experience, would probably be a better M," he adds, mentioning Bond's boss, played by Dame Judi Dench. "There is, come to think of it, a kind of Judi Dench quality to McCain."

A few readers may recall my response in this very space four years ago:

Oh, great. John McCain has survived plane crashes, just like Roger Moore in Octopussy. He has escaped death in shipboard infernos, just like Sean Connery in Thunderball. He has endured torture day after day, month after month, without end, just like Pierce Brosnan in the title sequence of Die Another Day. He has done everything 007 has done except get lowered into a shark tank and (as far as we know) bed Britt Ekland and Jill St. John.

And yet Daniel Craig gives him the desk job.

How A Handful Of Unsupervised MIT Economists Run The World

They are accountable to absolutely nobody

by Tyler Drusden

Ever get the feeling that the entire global economy is one big experiment conducted by several former Keynesian economists from MIT with a bent for central planning, who sit down in conspiratorial dark rooms in tiny Swiss cities and bet it all on green until they double down so much nobody even pays attention to the game? No? You should. Jon Hilsenrath, of all people, explains why.

From the WSJ:

Every two months, more than a dozen bankers meet here on Sunday evenings to talk and dine on the 18th floor of a cylindrical building looking out on the Rhine.

The dinner discussions on money and economics are more than academic. At the table are the chiefs of the world's biggest central banks, representing countries that annually produce more than $51 trillion of gross domestic product, three-quarters of the world's economic output.

Of late, these secret talks have focused on global economic troubles and the aggressive measures by central banks to manage their national economies. Since 2007, central banks have flooded the world financial system with more than $11 trillion. Faced with weak recoveries and Europe's churning economic problems, the effort has accelerated. The biggest central banks plan to pump billions more into government bonds, mortgages and business loans.

Pick your poison

Harry Truman doesn’t live here, y’all

By Jay Nordlinger

Many Republicans don’t want Susan Rice to become secretary of state. Her performance after the Benghazi attack was disgraceful, they say. Sure it was. But really: Who cares who’s secretary of state? Barack Obama is the president. The commander-in-chief. The decider. He’s the people’s choice. And whoever is secretary of state, will be his instrument. Moreover, whoever is secretary of state will agree with him — will share his worldview.

So . . .

I have a memory from the 2008 presidential campaign. A TV journalist named Gwen Ifill was scheduled to moderate the vice-presidential debate. And, interestingly enough, she had a book due out on January 20, Inauguration Day: The Breakthrough: Politics and Race in the Age of Obama. Obviously, she had a rooting interest — even a commercial interest — in Obama’s election. So why should she moderate a debate? That’s what a lot of Republicans said.

But others of us said, “Who cares, really? How would Ifill be any different from her colleagues, whether they have an Obama book pending or not? Pick your poison.”

That is my attitude about the secretary of state: Susan Rice, Hillary Clinton, John Kerry, Nancy Pelosi, Maxine Waters, Noam Chomsky (I exaggerate a little bit) — who cares who gets the nod? It will be an Obama foreign policy, regardless. It will be a foreign policy of the present-day Democratic party regardless.

Barack Obama is the people’s choice. They made that perfectly clear on November 6. Why he shouldn’t get his choice in the State Department, I’m not sure.

Is that too churlish for you? (Yeah, for me too, probably.)

Thank heaven the modern Democrats exist. How else would America get a black female secretary of state named Rice?

I was interested to read this article on a Korean rapper — not on a Korean wrapper, but about a Korean rapper. This is a rapper who spews hate and lies against the United States. Typical stuff, the kind of thing you’ve heard your whole life. (At least I have.) According to the article, this guy “is slated to perform for President Obama for a Christmas in Washington special.” Sure.

Welcome to Christmas Cubes!

Jihad on Christmas Trees

by Soeren Kern

"What will be next? Will all Easter eggs be banned in Brussels because they refer to Easter?" — Bianca Debaets, of Belgium's Christian Democratic and Flemish Party

More than 25,000 people in Belgium have signed a petition denouncing a decision to remove the traditional Christmas tree in the central square in Brussels and replace it with a politically correct structure of abstract minimalist art.

Critics accuse the Socialist mayor, Freddy Thielemans, of declaring war on Christmas by installing the "multicultural" structure of lights to placate the city's burgeoning Muslim population.

Historically, a 20 meter [65 foot] fir tree taken from the forests of the Ardennes has adorned the city's main square, the Grand-Place. This year, however, it has been replaced with a 25 meter [82] foot new-age-like structure of lighted boxes (see video here). Moreover, the traditional Christmas Market in downtown Brussels is no longer being referred to as a "Christmas Market." Instead, it has been renamed as "Winter Pleasures 2012."

The mayor's office, where more than half of the city's eleven councilors are either Muslim or Socialist or both, said the structure was part of a theme this year of "light." City Councilor Philippe Close, a Socialist, said the aim was to show off the "avant-garde character" of Brussels by blending the modern and the traditional to produce something new and different. He added: "The Christmas tree is not a religious symbol and actually lots of Muslims have a Christmas tree at home."

The One-State Illusion

Israel does need a two-state solution, because the continuation of the conflict is wrecking the country

By NOAH MILLMAN

Every now and again, when the Israeli-Palestinian conflict looks particularly intractable and/or when the Israelis seem to be operating with particularly obtuse intransigence, someone will point out that Israel desperately needs a viable two-state solution, because the alternative is a one-state “solution” that ends the Zionist dream of a Jewish state (whatever a “Jewish state” might mean – and nobody seems to agree on what it does). Some even declare that a two-state solution is already impossible, and that the only remaining option is granting the Palestinian Arabs of the West Bank (and Gaza?) equal voting rights within a bi-national state.

It should be clear to people who say these things that a one-state “solution” is an illusion, and this kind of rhetoric amounts mostly to moral posturing on the part of critics. By “posturing” I don’t mean to impugn the moral stance of said critics – they may or may not have right on their side; that’s another question – but to suggest that this stance has little chance of actually affecting reality.

Allow me to explain why a one-state “solution” is not going to be implemented.

An Islamic Egypt Not So Inevitable Anymore?

The Muslim Brotherhood faces either a protracted battle for consolidation of its power or ultimately being ousted from power

By Jonathan Adelman

The rapid rise of Muslim Brotherhood to power in Egypt after the deposing of Hosni Mubarak last year prompted many observers to see an Islamist Egypt as inevitable. After all, the Muslim Brotherhood was the best organized and most popular political party in Egypt, the opposition was divided, there was little Western support for the secular opposition and the United States welcomed Muslim Brotherhood delegations to the White House and worked openly with President Mohammed Morsi to achieve a ceasefire in the Israel-Hamas War.

All this seemed to many to be a rough replay of the 1979 Iranian Revolution.
Yet, as the mass demonstrations against the Muslim Brotherhood recently in Tahrir Square and across Egypt have shown, an Islamic Egypt, while still likely, is far from inevitable.

Charismatic leaders with strong political intuition, like Mao, Lenin, Tito, Castro and Ayatollah Khomeini, usually lead successful revolutions. They personified their revolutions and inspired the masses to coalesce around their leadership.

Morsi is no Ayatollah Khomeini, a religious leader who embodied revolutionary mysticism in his a triumphant return to Tehran in 1979 after 14 years in exile. Morsi lacks charisma and spent his life pursuing a Ph.D. at USC and chairing an Egyptian engineering school until 2010. His abrupt and radical moves do not reflect an adroit understanding of what to do when faced with a crisis.

The Ayatollah returned to an Iran rich in oil and gas revenue and quickly expropriated the great wealth the Shah had accumulated. He used this financial leverage effectively. Morsi and the Brotherhood are stewards of a very poor country. Egypt's GNP is $80 billion and its stock market is valued at $40 billion, two measures of national wealth that, by comparison, are less than 1 percent of the United States.

The Collapse of the Entitlement State

The huge amounts of public spending that the entitlement spree entails are in turn at the root of the sovereign-debt crisis

By Fabio Rafael Fiallo

The redistributive reforms (or follies) of the 20th century were largely inspired by two leading economic thinkers: Karl Marx and John Maynard Keynes. Notwithstanding their ideological differences, they had one point in common: for both of them, income equalization serves to promote economic growth.

For Marx and his progeny, class struggle would lead to the demise of capitalism and to its replacement by a superior, egalitarian system (socialism) that would usher the human kind into a world characterized by the abundance of goods and services to be distributed according to each one's needs.

A similar correspondence between income equalization and economic efficiency formed part of Keynes' ideological paraphernalia. To combat recession, he argued, income should be redistributed among the poor - through hiring workers for public works. The rationale: the wealthy save more than the low-income classes, whereas what is needed at times of recession, Keynes added, is to reactivate aggregate demand (hence consumption) so as to induce firms to increase output and enlarge payroll.

The 20th century showed the limits, or rather, the failure, of both policy visions. Contrary to Marx's anticipation, the construction of the communist paradise turned out to be an economic fiasco and a political nightmare. Keynes' policy prescriptions, for their part, led to the "stagflation" debacle that nearly paralyzed the world economy in the 1970s.

In spite of such failures, the belief that income equalization enhances economic growth continues to pervade conventional wisdom. That belief lies behind the entitlement spree that advocates soaking the rich through taxation so as to give the State the means of promoting growth by reducing inequalities among social groups, regions and countries.

Lessons from our friends in the North

The secrets of the Nordic model that has appeared immune to the crisis engulfing the rest of Europe

By Alyson JK Bailes

The European Union’s southern member states – Greece, Italy, Spain and Portugal – have become the sick men of Europe, helping to turn the EU into one of the sicker regions of the world. In contrast, Denmark, Finland, Norway and Sweden have stood out by keeping much of their reputation and self-confidence intact, as well as retaining decent growth figures.

This has been achieved without swingeing budget cuts or reneging on social obligations. These countries still exhibit the combination of efficient production, high tax and high living standards that has been called a ‘third way’ or ‘Nordic model’ in the past, and which is now seizing attention again for its apparent crisis-busting properties.

The misfortunes of Iceland – the smallest Nordic country – arguably prove the rule. Under a series of centre-right governments it privatized most strategic sectors and let the banking industry expand practically free of regulation. These were deviations from the supposed Nordic model even if Icelandic social policies remained generous. In addition, Iceland’s adversarial political culture was and remains more American or British than Scandinavian in spirit: aggravating the risk of special interest groups manipulating policy, but also making it harder for the country to pull together in a crisis. 

Iceland aside, there is reason to ask what the Nordics may be doing right that the southern Europeans – and Irish – have got wrong. But how complete is this contrast? 

By their own reserved, consensus-loving standards, the Nordics have experienced major dramas since 2008. Denmark as well as Iceland saw landslides from Right to Left in post-crisis elections, producing governments that have struggled to maintain authority. In Sweden and Finland, new nationalist and anti-EU parties have achieved parliamentary representation. In Norway, the Breivik tragedy could hardly be blamed on the euro crisis, but it brought painful soul-searching over how a Norwegian could do such things and why the police responded so ineptly. 

In economic terms, too, the Nordics’ fast rebound after 2009 now shows signs of slowing. Swedish growth for instance fell from 5.7 per cent in 2010 to 4.2 per cent in 2011, while Finland and Denmark remained static. That Sweden became the first EU member to introduce a pro-growth budget in 2012 is noteworthy for the fact that its canny Finance Minister, Anders Borg, found it necessary.

Broken Promises

Pensions All Over America Are Being Savagely Cut Or Are Vanishing Completely

By Michael Snyder

How would you feel if you worked for a state or local government for 20 or 30 years only to have your pension slashed dramatically or taken away entirely?  Well, this exact scenario is playing out from coast to coast and in the years ahead millions of elderly Americans are going to be affected by broken promises and vanishing pensions. 

In the old days, things were much different. You would get hired by a big company or a government institution and you knew that the retirement benefits that they were promising you would be there when you retired in a few decades. Unfortunately, we have now arrived at a time when government institutions and big companies have promised far more than they are able to deliver, and "pension reform" has become one of the hot button issues all over the nation. 

Many Americans that have been basing their financial futures on their pensions are waking up one day and finding that their pensions are either gone or have been cut back dramatically.  According to Northwestern University Professor John Rauh, the latest estimate of the total amount of unfunded pension and healthcare obligations for state and local governments across the United States is 4.4 trillion dollars.  America is continually becoming a poorer nation and all of that money is simply not going to magically materialize somehow.  So where is that 4.4 trillion dollars going to come from?  Well, either pension benefits are going to have to be cut a lot more all over America or taxes will need to be raised dramatically.  Either way, we are all going to feel the pain of these broken promises.

A new 'Mad Max' sequel?

Fighting for scraps in the ruins of a higher civilization

Bu the OCR Editors

Californians increasingly may be on their own against criminals because of state and local budget problems. Two recent reports are scary.

KCBS wrote, "Burglaries are up a startling 43 percent in Oakland this year compared to last, part of an ever-growing crime problem in the city.... The city could be down to a little more than 600 [police] officers by February, which would be 200 fewer than in 2008."

In San Bernardino, according to CBS News, "[City Attorney Jim] Penman said the city is dealing with bankruptcy, which has forced officials to cut its police force by about 80 officers." Consequently, there's been growing criticism about the police department's response time.

"Let's be honest, we don't have enough police officers. We have too many criminals living in this city. We have had 45 murders this year ... that's far too high for a city of this size," Penman said.

Talking to a local group, Mr. Penman also said, "Go home, lock your doors and load your gun."

"Penman was stating the obvious in what is happening throughout the state," Sam Paredes told us; he's the executive director of Gun Owners of California, a gun rights group. "Law-abiding citizens are buying more guns than ever." He estimated that 1 million guns will be sold in the state this year. "With all the stories and articles about prison realignment," in which state prisoners have been released, or sent to local jails, "people are realizing that their primary means of defense is themselves."

Greece Shows What Happens When The Welfare Ponzi Ends

When no more money flows in, to fund outflows, then the jig is up for the pension fund ponzi

This, as evidenced by the 'punching, kicking, and tearing at clothes' that a Greek pension fund manager endured recently, is exactly what has begun in Greece. As Reuters reports, the fund manager "enraged" here audience when she asked the Greek journalists to 'double their contributions' to their social security fund, and spent the night in hospital for her efforts to keep the ponzi alive. It was a brutal sign of the fury many Greeks feel at the way the country's debt crisis has dashed hopes of a comfortable old age. As New Democracy's leader noted: 

"From July 2010 it was obvious that a debt restructuring would be inevitable. While foreign banks were unloading their Greek government bonds, no one moved to tell Greek pension funds to do something, that a haircut was coming." 

Under a law passed in 1997 and refined in 2007,pension funds have to place 77% of any surplus cash in a pool of 'common capital' which must be invested only in Greek government bonds or Treasury bills (T-bills). So the PSI saved German and French banks but crushed Greek pensioners...

Via Reuters:

...  For hours the leader of the Greek journalists' social security fund had been chairing a meeting about disastrous losses on retirement savings caused by the country's economic collapse. "She tried to present herself as the fund's savior and asked (members) to double contributions to 6 percent of salaries," said one of those present that night at the Titania hotel. Spanopoulou, 58, did not succeed.

When she rose to leave around midnight, enraged fund members first swore, then waded in punching, kicking and tearing at her clothes, according to witnesses. A bodyguard managed to bustle her out of the room, but another group caught her just outside the hotel and gave her a second beating. She spent the night in hospital.

Government Employees, Unions, And Bankruptcy

The salad days of the government employee are coming to an end, as they have already in Greece, Italy and Spain

by James E. Miller

During an economic boom, exuberance finds itself lodged in all types of industries.  When profits soar, so does the public’s disregard for prudence.  And as tax revenues rise, politicians can’t help but give in to their bread and butter of buying votes.  Periods of accelerated economic growth typically come in two different forms.  If capital is drawn from a pool of real savings to finance investment in more efficient forms of production, the boost in wages and income will be sustainable as long as consumers remain willing to purchase whatever is being produced in greater amounts.  In the case of a credit-expansion boom fueled primarily by fractional reserve banking and interest rate manipulation through a central bank, the boom conditions are destined toward bust.  Liquidation then becomes necessary as the bust gets underway and malinvestments come to light.

For private industry it means slashing costs, laying off workers, and possible bankruptcy to discharge debt.  For government, it typically means shoring up the lost revenue due to unemployment by raising taxes and promising to cut spending by some significant amount.  Usually those promised cuts never come to fruition.  Political reelection hinges too much upon filling the pockets of voter blocs.   When private enterprise tightens its belt, the state hardly bats an eye since its revenue is dependent on how much it decides to fleece from taxpayers in any given year.

Some levels of government aren’t so lucky however.  Without ready access to a printing press or eager creditors, local municipalities in the U.S. are facing tough choices as the Great Recession drags on.  Unable to cope with the rising cost of providing public services, many cities are taking drastic action.  Three major cities in California have recenlty declared bankruptcy; including San Bernardino which is the second largest city to do so in recent history.  The city council of Detroit, which is facing about $12 billion in pension and benefit obligations, has voted to allow a state advisory board to assist the former manufacturing powerhouse grapple with a fiscal future that is anything but promising.  North Las Vegas, Nevada is facing the same kind of hurdle with a gaping $30 million budget deficit.  According to Mayor Sharon Buck, “We’ve balanced our budget, we’ve paid all of our bills [and] all of our bonds are paid…Our biggest issue is salaries and compensation and benefits. And they’re very unsustainable.”  Most recently, the mayor of Scranton, Pennsylvania cut the wages of city workers to the state’s minimum wage of $7.25 an hour.  The unions which represent the city’s firefighters, police officers, and other public workers are taking the issue to court.

Go West Young Man, To The "New Normal" Dream Job

California State Workers Earning $822,000

By Tyler Drusden

There was a time when working on Wall Street, either on the sell or buy side,  was the dream of every able-bodied worker who could do simple addition in their head and wasn't afraid to cut the occasional corner in exchange for a bottle of Bollinger and a sizable year end bonus. That, however, was so 2006 and with the long overdue conversion of the banking sector into a utility the stratospheric compensation payments from the peak of the credit bubble are long gone. So what is the New Normal dream job? Become a California state worker, preferably one who deals with neurotic and/or crazy people (i.e., a psychiatrist), and rake it in. The following chart from Bloomberg shows just how generous the otherwise insolvent state of California is when it comes to paying its public servants, and the 100%+ increase in California employee state pay since 2005. Needless to say, this is a rate of increase in compensation that 99% of workers in the private sector would die for.

Some other stunning observations from Bloomberg on the best job taxpayer money can buy. The best paid job: psychiatrist. At this pace, they will have lots and lots of patients.

Psychiatrists were among the highest-paid employees in Pennsylvania, Ohio, Michigan and New Jersey, with total compensation $270,000 to $327,000 for top earners. State police officers in Pennsylvania collected checks as big as $190,000 for unused vacation and personal leave as they retired young enough to start second careers, while Virginia paid active officers as much as $109,000 in overtime alone, the data show.

The numbers are even larger in California, where a state psychiatrist was paid $822,000, a highway patrol officer collected $484,000 in pay and pension benefits and 17 employees got checks of more than $200,000 for unused vacation and leave. The best-paid staff in other states earned far less for the same work, according to the data. ...

Popcorn As Political Pork

Why isn't the public popping mad?

by Richard B. McKenzie

Our Washington political leaders seem to be running like lemmings toward a fiscal Armageddon that Greece has recently reached. According to the Congressional Budget Office, the federal deficit was $1.1 trillion for fiscal year 2012, down from $1.3 trillion in 2011.1 At the end of fiscal 2012, the gross federal debt was 105 percent of gross domestic product for the year and is expected to rise to above 107 percent in the current fiscal year.2 No one should be sanguine that the CBO's projected lower federal deficits for the rest of the 2010s will be realized.

Nevertheless, virtually all members of Congress continue to pack "political pork" into the federal budget, in the form of both earmarks and expansions of their favorite transfer programs.3 Each member can correctly reason that his (or her) preferred package of pork, alone, will not significantly affect federal deficits and, therefore, the fiscal fate of the country. Such thinking derives from "the logic of collective action" that the late economist Mancur Olson laid out nearly a half century ago.4 As Olson pointed out, each person (or lobby) has an incentive to seek his (or its) special program because, while everyone bears the costs, only that person or group reaps the benefits. For that reason, the prospect of a fiscal doomsday is growing.

One recent example of this collective logic at work is the new subsidies Congress has included in the current farm "reform" bill for—are you ready?—popcorn. At this writing, the farm bill of 2012 has not passed Congress, with the delay perhaps due, in part, to the recent national election in early November.

The Pork in Popcorn

If the bill passes, popcorn growers will now join a long list of grain farmers (growers of wheat, corn, grain sorghum, barley, oats, long-grain rice, medium-grain rice, pulse crops, soybeans, other oil seeds, and peanuts) whose wallets have been padded by American taxpayers in a variety of forms—including payments for non-production—over the past century. The new subsidies would be in the form of government coverage of a sizable portion of popcorn farmers' crop insurance and export promotions. This benefit would be no less a subsidy than direct payments to farmers for not planting crops. A subsidy for export promotion would drive up the price of domestic popcorn and, hence, increase popcorn growers' revenues and profits at the expense of American consumers and taxpayers. Subsidized crop insurance for popcorn growers could dampen price increases but, as with the export promotions subsidies, American taxpayers would foot the bill.

Peak Oil or Peak Energy? – A Happy Solution

Let’s turn free markets loose!

By John Mauldi

A consistent theme in this letter has been the connections between items that may seem to be far removed from each other but are actually linked at the very core. If you push on one end you get a reaction in what would seem to be the most unlikely spots. Today we explore the connection between the fiscal deficit and energy policy. Everyone in Washington is starting to “get religion” about wanting to fix the deficit, with serious thinkers on all sides acknowledging that there must be reform and a path to a balanced budget. Burgeoning healthcare and Social Security costs are rightly pointed to as the problem, and entitlement reform will soon be front and center.

But the fiscal (government) deficit in the US cannot go away unless we also deal with the trade deficit. As we will see, it is a simple accounting issue, and one based on 400 years of accepted accounting principles. And dealing with the trade deficit in the US means working with our energy policy.

The trade imbalances among the partners in the eurozone are at the heart of the problems there as well. And while we will get back to Europe in a few weeks (remember when we seemed to be focused on Europe and Greece for months on end?), today we will explore the trade problem from a US perspective. Happily, this problem, while serious, does have a workable solution. And it might even happen in spite of government policy, though if a proactive energy policy were developed, it could ignite a true economic renaissance.

I have been wanting to explore the implications of the shale oil revolution. Old oil fields are wearing out, as peak oil advocates point out. Where can we find the huge and cheap-to-exploit oil fields to replace them? Hasn’t all the easy oil already been found? We will start in the Texas of my youth, journey to North Dakota where I was last week, and then think about the implications of that journey. There are many connections and interesting paths to explore. The letter will print a little long, as there are a lot of charts.

It Takes an Entrepreneur

First though, I have to take you back to Wise County, Texas, about 60 miles west of Fort Worth. A Greek goat herder named Savas Paraskivoupolis (who changed his name to Mitchell) came to Galveston in 1905. His son George Mitchell worked his way through Texas A&M and got a degree in petroleum engineering. After the war, George teamed up with his brother Johnnie and Merlyn Christie. They drilled their first well in 1952, in what became known as the Boonesville Field in Wise County, near Bridgeport where I grew up. They went on to drill hundreds of gas wells but had to shut them down because they had no way to deliver the natural gas they found in abundance. The work was done at serious financial risk, but they just kept drilling and plugging those wells. Finally a contract for a pipeline was financed by an Illinois utility, and those wells went into production.

What started as Christie, Mitchell and Mitchell soon became a major employer in my little hometown and a powerful spur to the local economy. The future father-in-law of my childhood best friend was first permanent North Texas employee, back in the early 1950s, and he was eventually joined by the fathers of many of my friends.

Over the coming years Mitchell would drill over 10,000 wells, with over 1000 of them being wildcat or exploratory wells. He is a legend. His story is reminiscent of that of Walt Disney, who also lived constantly on the edge of crisis in the early days of his business. In the late ’80s and early ’90s Mitchell pioneered a new drilling method called horizontal drilling. It is still hard for me to imagine, that there is a small amount of flexibility in what seems like rigid steel pipe. Over hundreds of feet of drilling, they can turn a pipe inch by inch until it describes a 90° arc.