Inequality and the Decline of Labor

Inequality has many sources, but political and technological dynamics are key factors

by Charles Smith

You may have seen this video on Wealth Inequality in America, which has gone viral. I have shown the same data for years in charts and discussed it at great length: Made in U.S.A.: Wealth Inequality (July 15, 2011).

The bottom 80% of American households held a mere 7% of these financial assets, while the top 1% held 42.7%, the top 5% holds 72% and the top 10% held fully 83%.

Here is a snapshot of total assets by category:

"Other assets" include Treasury and corporate bonds, favored holdings of pension funds and the wealthy due to their relative safety and guaranteed yield.

Here is a snapshot of stock ownership:

No surprise there: the top 1% owns roughly 40% of all stocks, and the top 10% own 81%.

Wealth comes from earned and unearned (rent, dividends, etc.) income and capital appreciation, so it's no surprise that the income of the wealthiest segment has also far outpaced the lower 95%:

I have long held that the greatest source of wealth inequality is political: those with great wealth have captured the for-sale machinery of governance, and "persuaded" the Central State to carve out quasi-monopolies and cartels that enable artificially high premiums. They also buy subsidies, exceptions and tax breaks for their income streams.

This is the result of a dominant Central State and an electoral process that lives and breathes cash and lobbying.

A 'Politically Explosive' Secret

Italians Are More Than Twice As Wealthy As Germans

By Wolf Richter
In December 2006, the ECB established the HFSC network of survey specialists, statisticians, and economists from its own ranks, national central banks of the Eurozone, and statistical institutes. The acronym stood for Household Finance and Consumption Survey.

It would collect “micro-level structural information” on household wealth. A massive bureaucratic undertaking. Surveys went out in 2010. Results are now ready. No one in Europe had ever done a survey on that scale before.

And no one might ever do it again. Because, in the era of bailouts and wealth-transfers, the results are so explosive that the Bundesbank is keeping its report secret—and word has leaked out why.

The surveys were conducted on a national basis, with each central bank publishing its own report. They would then be combined and summarized by the ECB into a cohesive picture of how wealthy—or how poor—people in various parts of the Eurozone were. A number of countries already published their reports, including Italy and Austria.

What the Austrian National Bank found was not pretty (20-page PDF). The considerable wealth in Austria was very unevenly distributed. The wealthiest 5% owned nearly half of the country’s wealth. Their median wealth was €1.7 million in diversified assets. The lower 50% owned only 4% of the country’s wealth. Of them, 83% rented their homes. Their median wealth was a measly €11,000 consisting usually of a car and a savings account. That’s half of the people! And 10% had a net wealth of less than €1,000.

This unequal distribution of wealth created a huge gap between median income (half the people earned more, the other half less) of €76,000 and average income of €265,000 (pushed up by a small number of extremely wealthy households). And that’s why some countries don’t even publish average income values. Too much truth would hurt.

Germany’s data is likely to be similar—but the Bundesbank is treating its report like a secret. Because the results are, let’s say, awkward for two reasons.

The highly unequal distribution of wealth is one of them. The German government already went through wild gyrations late last year, and now again, over its Poverty Report that exposed some inconvenient facts that were then edited out—something that was leaked immediately, and it caused a ruckus [read.... Censored: Poverty Report in Germany].

Italy is the other issue. But it may be too hot for the Bundesbank to touch. Italy’s report (142-page PDF) finds that median household net wealth has increased 56% since 1991. And from 2008 to 2010, it increased by about 5% annually, despite the crisis!

But the wealth of German households stagnated during much of that time while they paid taxes out of their noses. And now they might learn that Italy’s median household wealth is €163,875—while Germany’s is closer to Austria’s, around €76,000. Less than half!

China robots signal US challenge

The 21st century will be a world led by ideas

By Joshua Jacobs and Eftychis Mourginakis 

A little over two years ago Terry Gou the CEO of Foxconn announced that over the next three years his company was going to begin phasing in up to 3 million industrial robots with an eye towards increasing efficiency and reducing labor costs. This announcement, from the world's largest electronics contract manufacturer, sent waves through the media and business community. Foxconn employs over 1.5 million people in China, in hundreds of plants and facilities, scattered around the country. 

The prospect of Foxconn shifting towards robotic labor has enormous implications for the future of not just the Chinese, but also global labor markets. This is primarily because of the type of work that the robots engage in is the assembly of complex electronics, an area previously thought beyond the capabilities of commercial robotics and left presumably to human hands. So far, the robots seem more than up to the job. 

While the headline grabbing prediction of "millions of robots" does not seem to have panned out in the time frame that Gou predicted, Foxconn has nevertheless managed to deploy significant numbers of its new robotic workers. Over the course of last year, Foxconn managed to install 30,000-50,000 new robots in its factories, and is aiming for 300,000 more by 2014. 

What is astounding about this information is the impact it already has had. According to Liu Kun, a spokesman for Foxconn, "We have canceled hiring entry level workers, a decision that is partly associated with our efforts in production automation." Moreover according to the International Federation of Robotics the growth of industrial robotics in China has been exceeding 40% to 50% a year, an unprecedented level of growth. The question that springs to mind is: What would happen if Foxconn actually had 3 million robots?

The advent of truly sophisticated and relatively cheap industrial robotics and automation technology is beginning to change the global economic landscape. The fear in China is that the Lewis Turning Point, the point where rural laborers moving to urban manufacturing loses its value, is being accelerated by the mass adoption of industrial robotics that reduce the value and efficiency of new human labor. This is precisely the pivot point that American manufacturers are starting to seize upon. 

Driven by changing economic realities in China, American industries are looking toward the boon provided by new technologies to "reshore" back to the United States. Breakneck advancements in 3D printing, artificial intelligence, robotics, and industrial automation are bringing us close to a factory floor that is more sophisticated and advanced than ever before. The result is home grown industries capable of producing complex and high quality products with greater efficiency and economy than ever thought possible. 

Europe is Drowning Under Too Much Government

The Eurozone is now on track for a hyper-inflationary outcome, rather than a deflationary collapse

by Alasdair Macleod

The Christmas and New Year's break, when Europe shuts down and stops thinking, is now well and truly over, and we are reawakening to the same old problems: Greece, Spain, Cyprus, Portugal, Italy, France…all with their hands out for money from Germany, Holland, Finland, and Austria.

The holiday from the banking crisis, which was the result of the determination of the ECB to put a lid on it, is also over, with yields on the supplicant countries’ debt rising again.

However, joining the bad news list is the United Kingdom. Ominously, the pound is sliding in the foreign exchange markets, providing a very tricky background for Chancellor Osborne’s budget on March 20^th. I shall examine the UK’s position later, but first let’s update ourselves on developments in the Eurozone.

The reality is that all the problems of the Eurozone are still with us, despite the fall in bond yields and their modest subsequent recovery. There is now the likelihood that we are about to enter the final phase of the end of the Eurozone experiment, with far wider consequences. So we need to pick up the story where we left off.

First, let’s look at the trend of government-debt-to-GDP for selected countries (the numbers are from the ECB):

As we can see, government deficits for these countries took off from the time of the banking crisis and are still increasing beyond the charts’ cut-off point into 2012. They reflect poor economic performance, a lack of desire to slash government spending, and contracting bank credit. Only Spain and France were below Carmen Reinhart and Ken Rogoff’s tipping point of 90% government debt-to-GDP (see their book, This Time is Different), but in Spain’s case for 2012, if you add in €27bn raised to pay the backlog of bills incurred by regional governments and the €40bn so far (and rising) to bail out the mortgage banks, today Spain is closer to 100% debt to GDP, and France’s is now over 90%.

Bank credit continues to be withdrawn by European cross-border lenders, as the figures from the Bank for International Settlements, which run from the time of the banking crisis, show in the next chart:

The Arrival of Japan's Sunset

The repercussions will be tremendous

by Gregor Macdonald

Waiting for Japan's economy to make a strong recovery has been an ongoing game since 1990. Shall we play that game one more time?

There have been many false dawns in Japan over the past 20 years. Struggling with a combination of crushing debt and deadly demographics, Japan’s economy has stubbornly refused to make progress, despite numerous government efforts that range from currency devaluation to endless public works projects.

None of this was enough, however, to prevent further declines in the country’s fertility rate, for example, which only exacerbated deflationary pressures on the economy. Nor were the collective set of policy measures enough to boot capital flows away from the bond market, as Japan’s savers simply kept on saving.

For the past twenty years, value investors have probed the individual names in the Nikkei for cash rich insurance companies, debt-free manufacturing companies, and for rock-bottom low P/E names, all in the hopes of riding a broader recovery higher. Alas, no sustainable recovery in Japan’s economy or stock market has ever unfolded.

One can only smile at the reaction that more senior, experienced Japan recoverists must now be feeling as they watch a new generation succumb to the excitement of the latest resurrection of Japan’s economy. That the Nikkei is up by 25% in just 90 days has triggered all sorts of congratulatory commentary, even from Nobel Prize winners like Paul Krugman, who also is swept up in the latest round of recovery fever:

Krugman explains that one of the problems with modern central banking is that people believe they're too credible in their desire to stamp out inflation when it starts to pick up. So in other words, the Central Bank may say it will let growth and inflation run hot for awhile (so that nominal GDP can catch up to trend) but nobody believes that they'll actually do that. What Japan may be in the process of doing -- by having the Bank of Japan take orders from the Ministry of Finance and the new Prime Minister -- is solve this problem, by having the bank commit to being irresponsible.

Thankfully, Japan’s latest attempt to recover by aggressive devaluation is almost assured to provide resolution to its generational quagmire. But the outcome will not look anything like recovery.

Instead, Japan has entered the terminal phase of its long, reflationary road.

Culturally, the frustration and exhaustion at the country’s lack of progress has unsurprisingly led to this important juncture. The Japan recoverists are correct that the latest round of monetary policy “is not like the others.” However, the results are likely to provide a real-world test case of the limits of Keynesian policy at a time when the world faces scarce resources.

This final chapter will be spectacular. So in a lurid sort of way, we should be thankful that Japan has now crossed the threshold and is ready to proceed to its denouement.

The Miracle of Post-War Japan & Resource Arbitrage

Students of ecological economics should pay close attention. Japan is about to add itself as a test case.

Ecological Economics is a thesis of elegant simplicity. Simply put, the economy is a subset of the environment – and not, as neoliberal economists would have you believe, the other way around. Economies can "grow" up to the limit of the natural resources which they can extract, or acquire.

In a time of cheap resources, when the cost of inputs is extremely low, the importance of these inputs tends to be ignored. Thus, we can see the most obvious implication of environmental economics is that extraordinary profits can be harvested when the price of resource inputs is low and the purchasing power of consumers in the market place is high.

The Great Singularity

The inmates are now in charge of the asylum

by Mark J. Grant

“Depend upon it, Sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”   - Samuel Johnson

The world today does not smell of lavender and lilacs these days but more like old grease that has gone rancid. Always a skeptic, I find myself these days looking with more of a jaundiced eye than usual as I stare out on the fiscal landscape. Yesterday a High Court Examining Magistrate opened a second investigation into the ruling party in Spain examining new corruption charges that include Prime Minister Rajoy. These focused on money paid by the construction industry but a second article by Reuters made me wonder. This story centered on Santander selling off $393 million in troubled assets to a hedge fund. What caught my eye here was that they were apparently sold at four cents on the Dollar; a 96% discount. You might think write-off but the bank is having serious difficulties so that doesn’t quite fly. You might think some other reason in the normal course of business but at four cents on the dollar there is scant benefit to be gained. I wonder if Santander wasn’t, given the two ongoing investigations, not removing consumer loans from their books, as reported, but questionable loans that they did not wish to be investigated. If the loans are not there then they cannot be found and if they can’t be found then perhaps it lessens the chance of implication and criminality. I look at it all and wonder.

“Every man serves a useful purpose. A Prime Minister who has been caught stealing, for example, may make a perfect scapegoat for the next man that assumes his office.”

                                                                                  -The Wizard

Meanwhile in Italy the spaghetti sauce continues to boil. It once simmered but the heat has been turned up and it is a full boil now. Every political leader on the Continent is hoping for a deal. I can almost visualize them wandering around, “Deal, deal where is the deal?” I can see Signore Grillo on the dais, “No Deal,” he proclaims to the audience as the contestants hem and haw in frustration and the crowd goes wild. What is worse for the people in Berlin and Brussels is that every indicator points to that if another election were held that Signore Grillo would emerge with even more votes and maybe a majority of votes. This is not politics as usual in Italy. The 5 Star Party does not wish to play by the old rules. They want to re-write the Rulebook.

Drones too convenient to keep overseas

It will not be pretty

by mark steyn

I shall leave it to others to argue the legal and constitutional questions surrounding drones, but they are not without practical application. For the past couple of years, Janet Napolitano, the Secretary of Homeland Security, has had Predator drones patrolling the U.S. border. No, silly, not the southern border. The northern one. You gotta be able to prioritize, right? At Derby Line, Vt., the international frontier runs through the middle of the town library and its second-floor opera house. If memory serves, the stage and the best seats are in Canada, but the concession stand and the cheap seats are in America. Despite the zealots of Homeland Security's best efforts at afflicting residents of this cross-border community with ever more obstacles to daily life, I don't recall seeing any Predator drones hovering over Non-Fiction E-L. But, if there are, I'm sure they're entirely capable of identifying which delinquent borrower is a Quebecer and which a Vermonter before dispatching a Hellfire missile to vaporize him in front of the Large Print Romance shelves.

I'm a long, long way from Rand Paul's view of the world (I'm basically a 19th century imperialist a hundred years past sell-by date), but I'm far from sanguine about America's drone fever. For all its advantages to this administration – no awkward prisoners to be housed at Gitmo, no military casualties for the evening news – the unheard, unseen, unmanned drone raining down death from the skies confirms for those on the receiving end al-Qaida's critique of its enemies: as they see it, we have the best technology and the worst will; we choose aerial assassination and its attendant collateral damage because we are risk-averse, and so remote, antiseptic, long-distance, computer-programmed warfare is all that we can bear. Our technological strength betrays our psychological weakness.

And, in a certain sense, they're right: Afghanistan is winding down, at best, to join the long list of America's unwon wars, in which, 48 hours after departure, there will be no trace that we were ever there. The guys with drones are losing to the guys with fertilizer – because they mean it, and we don't. The drone thus has come to symbolize the central defect of America's "war on terror," which is that it's all means and no end: We're fighting the symptoms rather than the cause.

For a war without strategic purpose, a drone'll do. Anwar al-Awlaki, an American citizen born in New Mexico, was whacked by a Predator not on a battlefield but after an apparently convivial lunch at a favorite Yemeni restaurant. Two weeks later, al-Awlaki's son Abdulrahman was dining on the terrace of another local eatery when the CIA served him the old Hellfire Special and he wound up splattered all over the patio. Abdulrahman was 16, and born in Denver. As I understand it, the Supreme Court has ruled that American minors, convicted of the most heinous crimes, cannot be executed. But you can gaily atomize them halfway round the planet. My brief experience of Yemeni restaurants was not a happy one but, granted that, I couldn't honestly say they met any recognized definition of a "battlefield."

Terrorist's triumph over USA

Did the Department of Justice Really Say that the Government Would Not Assassinate Americans?

by George Washington

After a 13-hour filibuster by Senator Paul asking for a yes-or-no answer, on the question of whether the government could kill Americans on U.S. soil with drones, the Attorney General responded:

Dear Senator Paul:

It has come to my attention that you have now asked an additional question: “Does the President have the authority to use a weaponized drone to kill an American not engaged in combat on American soil?” The answer to that question is no.

Sincerely,

Eric Holder

But – as anyone who has worked in the legal or legislative field knows – statements which do not pin down all possibilities create loopholes large enough to drive trucks through.

Remember, Holder’s letter to Paul can’t be taken in a vacuum. The government has said for many months that it has the power to assassinate Americans on U.S. soil.

William Grigg notes:

This brief message from Holder … should be read in terms of the supposed authority claimed thereby. This means removing useless qualifiers in the interest of clarity.

What Holder is saying, in substantive terms, is that the President does have the supposed authority to use a drone to kill an American who is engaged in “combat,” whether here or abroad. “Combat” can consist of expressing support for Muslims mounting armed resistance against U.S. military aggression, which was the supposed crime committed by Anwar al-Awlaki, or sharing the surname and DNA of a known enemy of the state, which was the offense committed by Awlaki’s 16-year-old son, Abdel. Under the rules of engagement used by the Obama Regime in Pakistan, Yemen, and Afghanistan, any “military-age” male found within a targeted “kill zone” is likewise designated a “combatant,” albeit usually after the fact [update: children too]. This is a murderous application of the “Texas Sharpshooter Fallacy,” and it will be used when — not if — Obama or a successor starts conducting domestic drone-killing operations.

Holder selected a carefully qualified question in order to justify a narrowly tailored answer that reserves an expansive claim of executive power to authorize summary executions by the president.

Indeed, the Supreme Court ruled in Hamdi that American citizens can be treated as enemy combatants.

But the determination of who is a “combatant” is made in secret and without judicial review.  For example, AP notes:

Pentagon counsel Jeh Johnson … said only the executive branch, not the courts, is equipped to make military battlefield targeting decisions about who qualifies as an enemy.

Secretive, unaccountable agencies are making life and death decisions which effect our most basic rights. They provide “secret evidence” to courts which cannot be checked … and often withhold any such “evidence” even from the judges. For example:

“I find myself stuck in a paradoxical situation in which I cannot solve a problem because of contradictory constraints and rules — a veritable Catch-22,” the judge wrote. “I can find no way around the thicket of laws and precedents that effectively allow the Executive Branch of our Government to proclaim as perfectly lawful certain actions that seem on their face incompatible with our Constitution and laws, while keeping the reasons for their conclusion a secret.”

The government uses “secret evidence” to spy on Americans, prosecute leaking or terrorism charges (even against U.S. soldiers) and even assassinate people.

Secretive, unaccountable agencies are making life and death decisions which effect our most basic rights. They provide “secret evidence” to courts which cannot be checked … and often withhold any such “evidence” even from the judges. For example:

“I find myself stuck in a paradoxical situation in which I cannot solve a problem because of contradictory constraints and rules — a veritable Catch-22,” the judge wrote. “I can find no way around the thicket of laws and precedents that effectively allow the Executive Branch of our Government to proclaim as perfectly lawful certain actions [i.e. assassinations] that seem on their face incompatible with our Constitution and laws, while keeping the reasons for their conclusion a secret.”

Moreover:

The immorality of ‘sin taxes’

First Do No Harm

by Rob Lyons 

The apparent benefits of ‘sin taxes’ are greatly overstated for a variety of reasons. But the biggest problem of all is what they say about the relationship between the state and the citizen today.

Taxes on alcohol, smoking and ‘junk’ food are proposed ostensibly to reduce the incidence of a variety of diseases. But these diseases overwhelmingly affect older people. So we are being asked to pay more money or forego certain pleasures in exchange for a few extra weeks or months of life, on average. Alternatively, these taxes target conditions, like obesity, whose negative effects have been greatly exaggerated.

Such taxes do not hit the pockets of everyone in society equally; they are regressive, in that they hit poorer people disproportionately for a variety of reasons. So it seems that governments have come to save the poor by making them poorer.

It is claimed by some penny-pinching campaigners and medics that sin taxes save the state money by reducing ill health. It’s not true. To the marginal extent that such taxes do change behaviour in the desired fashion, the result will be people living longer and incurring greater costs in pensions and other old-age benefits, social care and healthcare. I’m definitely in favour of people living longer, but the argument that sin taxes are required to stop the National Health Service from being bankrupted is just wrong. If we were to take such a mean-minded approach to its logical conclusion, we should be congratulating smokers, for on average dying earlier than non-smokers, rather than trying to restrict smoking.

While taxes on tobacco and alcohol have been around for a long time, the idea that we should start modifying people’s behaviour in relation to food only really become fashionable recently. So when the Academy of Medical Royal Colleges (AoMRC) came out with a 10-point plan on reducing obesity a couple of weeks ago, the headline-grabber was the suggestion of a 20 per cent tax on sugary drinks.

Hugo Chavez R.I.P.

Chavez belongs to the ages ... like Peron and Melgarejo

by Bill Bonner

Today, we struggle to hold back tears. Another world leader has bit the dust. This time Venezuela's big chief. Some bleak corner of Hell took him in on Tuesday, if not before.

Chavez was a great entertainer. Real life was too small for him. He had to stretch the truth out... bend the real world into a larger, more fantastic shape... and puff it up with hot air until it could hold him.

In real life people go about their business, taking what fortune sends their way and doing their best with it. That stage was much too restricted for Chavez. He aimed to play a more important role under a much bigger proscenium arch. Naturally, he took up politics (the refuge of all fantasists) and tried to overthrow the Venezuelan government; he landed in jail.

The authorities let him out after a couple of years. He went right back to his mischief. A few years later and he was elected president of the country. But even that wasn't enough. He conspired to twist the nation's constitution to make himself "President for Life," which, in an act of divine mercy toward the Venezuelan people, ended this week.

Chavez was a great showman. He kept TV audiences entertained for hours, concocting a larger-than-life fairy tale about how terrible the foreign capitalists were and how his "Bolivarian Revolution" was setting things straight.

Alas, his lines were written by hacks; perhaps he wrote them himself. It took a real A-list actor to deliver his speeches with a straight face. The idea of a 21st Century Socialism, for example, that he claimed to have invented himself, was so transparently hollow and self-serving that a lesser thespian would have been laughed off stage.

A Magisterial Presence

Chavez followed in a long South American tradition of crowd-pleasing strongmen. Like Peron, Castro and Melgarejo, he was not only a leader the masses could adore, but he was also one they deserved.

Melgarejo has been largely forgotten. But he was one of the great standup guys of Bolivian politics. In 1854, like Chavez, he attempted a coup d'etat against the legitimate dictatorship of the time. He was captured. He was tried and found guilty. That should have been the end of him, but he came out with a convincing argument for clemency: that he was drunk at the time and not responsible for his actions.

President Belzu pardoned Melgarejo. A few years later, just to show his gratitude, Melgarejo murdered Belzu. Then came a real tour de force of political theatre, illustrating not only Melgarejo's magisterial stage presence, but also the masses' deep attachment to their leaders.

A crowd had gathered in front of the presidential palace demanding the return of Belzu. "Viva Belzu," they chanted.

Melgarejo appeared on the balcony. He had the dead body brought out and displayed to the crowd.

"Who lives now?" he asked them.

"Viva Melgarejo," they replied.

Having whacked his rival, Melgarejo soon became perhaps the most disastrous leader in the history of South America -- a hotly contested title. He is said to have signed the Treaty of Ayacucho with Brazil, in which he traded millions of acres of Bolivian territory for a "magnificent white horse."

In 1870, France and Germany went to war. Hearing reports of the German assault on Paris, Melgarejo rushed to defend the City of Lights.

He reputedly could not locate it on a map, but he was fascinated by what he had heard of it. So, he told his army to march to Europe. His military commanders informed him that they had no means to cross the Atlantic Ocean. Melgarejo replied: "Don't be stupid! We will take a shortcut through the brush!"

Cash and Claptrap

That was the sort of Bolivarian tradition to which Chavez was heir.

But Melgarejo was hardly the only legator. Chavez learned from Juan Peron too. Argentina had been one of the richest countries in the world, in the early 20th century. You can see the residue of it here today -- broad, tree-lined avenues and beautiful beaux arts, belle époque and arts nouveaux private buildings and public monuments. (The Argentines were great admirers of the French too!)

Now, Argentina is way down the list of the world's richest countries. Today, it is No. 54 on the CIA Factbook list -- with Trinidad and Tobago, Equatorial Guinea and Greece far ahead of it. That, along with periodic financial crises, massive strikes, disappearances and pointless wars, is the legacy given Argentina by Peron and his Peronist successors.

You'd think the gauchos and the porteños would have had enough of it by now. But they still elect Cristina Fernandez de Kirchner, a Peronist candidate, just as they voted for Chavez in Venezuela despite an economic record worthy of Mariano Melgarejo.

That's what makes the masses so attractive to leaders like Chavez: They are incredibly stupid. Consumer prices rise even faster in Caracas than in Buenos Aires. The power goes out, too. Despite being one of the world's top oil producers, supplies are so tight people are urged to take "socialist showers" to conserve energy. And the murder rate is among the highest in the world -- so high that even people from Baltimore are afraid to go there.

Chavez made their lives more miserable, but the masses still loved him. Of course, he paid for their affection. He took $100 billion in annual oil revenues and spread it around. Realizing that it would go further in poor neighborhoods than in rich ones, he built his popular support on cash and claptrap.

And now he is gone. The performances have come to an end. The show's over.

"Now he belongs to the ages," said Secretary of War Edwin M. Stanton when Abe Lincoln died. Now Chavez belongs to the ages too... like Peron and Melgarejo.

Good riddance.

Clowns Never Learn

Federal Spending in Inflation-Adjusted Terms

President Obama said the sequester cuts would be "catastrophic".

Reader Tim Wallace pinged me with a few comments to help put those catastrophic cuts in perspective.

Tim asks: If you were making $50,000 per year in 2007 and you income went up to $70,000 (a 40% increase in six years), would a $1,750 pay cut to $68,250 be catastrophic?

Apparently it would be for the Obama administration. The federal budget is up 40% from 2007 and the Democrats and President are telling us they cannot afford to cut spending 2.5%.

Not that the "cuts" are real in the first place. All that is really being cut is a decrease in the projected increase. A chart of Federal Spending from PJMedia will add another perspective.
Backing Away From Catastrophic Talk
For obvious reasons (shown above) Larry Kudlow notes The 'Catastrophic' Sequester Narrative Dies a Quick Death 

However you calculate the sequester spending cuts, and however uneven they may be, the reality is that the sequester at least moves the ball in the right direction. I maintain that by reducing the government spending share of GDP, the sequester is pro-growth.

The White House and the CBO are predicting a 0.5 percent to 0.7 percent decline in GDP, post-sequester, and a loss of 750,000 jobs. All this from a spending reduction of roughly 2.4 percent over the next ten years, in which Uncle Sam's spending growth will be $44.8 trillion rather than $46 trillion. 

Fed chairman Ben Bernanke and other demand-siders have called for a slow, gradual federal-spending reduction. Well, that's exactly what they're going to get. The first fiscal year of sequester will see $44 billion in spending cuts, which is about one quarter of 1 percent of GDP. That's pretty gradual. 

And compare that $44 billion 2013 spending cut (most of which is slower baseline growth, not a cut in spending levels) to a roughly $150 billion 2013 tax hike. Hmm, let me get this right: It's okay to raise taxes, because that won't hurt the economy, but it's not okay to cut spending, because that will lower output?

And while the business sector has survived to become highly profitable, the federal sector has become bloated, edging ever closer to debt bankruptcy.

A Storm Is Brewing

Tone-Deaf Eurocrats

The reaction of the European leadership to the Italian post-election predicament has been quite predictable so far: there is no choice, so the consensus, but to basically continue where Monti has left off. This seems quite odd, given that Monti actually left Italy with a new post war record high public debt relative to economic output. What has he done except raising taxes and harassing the public with his 'shadow economy' clampdown? What has been achieved in terms of genuine economic reform or slimming down of the State? Nothing. “Euro Leaders Demand Austerity” writes Bloomberg. Mind, there is nothing wrong in principle with austerity, especially not the kind that involves a lowering of the burden on the economy imposed by government spending, ideally combined with meaningful economic liberalization. This has become nigh impossible though in view of the thicket of regulations emanating from Brussels. As this article from last year argues, Brussels makes regulations tailored for big companies – but big companies only represent 0.2% of all European businesses. They love the regulatory State of course, because it kills their competition for them without them having to lift a finger. Big companies are the only ones that can actually afford dealing with all these regulations.

What Monti has left behind: the biggest debtberg since Mussolini

Mrs. Merkel is actually right with what she says below, in principle. However, the implication of what she says is that something needs to be done that actually ends up producing growth. Doing little besides trying to lower budget deficits by jacking up taxes is not going to produce any. 

“Now in Europe, after the Italian election, it seems to be a case of either austerity and savings programs or growth, but that’s a completely false premise,” German Chancellor Angela Merkelsaid at March 1 event. EU Economic and Monetary Affairs Commissioner Olli Rehn echoed those comments, telling Germany’s Der Spiegel magazine this weekend that there’s no scope for the bloc to let up on budget discipline.

Italian political instability, after last week’s election ended in a four-way split, threatens to reignite concern about the deepening of the debt crisis.Voters in the bloc’s third- largest economy revolted against German-inspired austerity measures, handing the party of comedian-turned-politician Beppe Grillo more than 25 percent of the vote with its anti-spending cut message and a call for a referendum on euro membership.” (emphasis added)

The above sounds almost as though Grillo's movement wanted to increase government spending again, but that is actually not quite true as it turns out.

As Der Spiegel reports:

“The Grillini like to point out that they too intend to cut spending. What that means can be seen in the city of Parma, saddled with €800 million in debts. For the past three-quarters of a year, Parma has been governed by Mayor Federico Pizzarotti, 39, a member of the movement who has been busy trimming the fat from the municipal budget. He rides a bicycle to work and has exchanged two official sedans for an Opel natural gas vehicle. He adheres to the rules of the movement and doesn't spend more than what he collects in taxes, but he's still not seen as the Germans' cost-cutting commissioner.” (emphasis added)

What makes Grillo suspect to the eurocratic elites is that he is an anti-establishment figure; that he doesn't regard euro membership as sacrosanct, and intends to increase the level of direct democracy in Italy. This is not to say that the man's economic policy ideas are necessarily better than what has been on tap so far, as he has a number of ideas that strike one as steeped in a kind of naïve romantic socialism.

Green Economics Turns Brown In The UK

Pulling the plug on Green Pipe-Dreams

By Chriss Street

The United Kingdom has been the heralded as the most committed country on earth to embrace green economics. Powered by huge government subsidies, environmental and low-carbon businesses now claim to employ over one million people and make up 8% of the UK’s GDP – from biofuels, electric cars, wind turbines and solar installations.

But with the nation heading into its third recession in four years and losing its AAA credit rating, the British public seems ready to pull the plug on green economics and join the “Dash for Gas” to begin fracking the nation’s immense deep coal deposits.

Following the Financial Crisis of 2008-09, the UK government committed to Keynesian deficit-spending stimulus to “grow” the country into the world leader in green economics. Through public spending and government direct guarantees of high returns to private leveraged investors, total investments in UK renewable energy projects grew from $6.9 billion in 2010 to $9.4 in 2011. More than 800 MW of wind, 300 MW of solar and 500 MW of biomass generating capacity was funded. Phyllis Cuttino, author of the Pew Charitable Trust Energy Report, "Who’s Winning the Clean Energy Race?" stated: 

“In part, investment growth in the United Kingdom can be attributed to investors initiating new projects before policy incentives are curtailed. To maintain growth, the UK must provide consistent, long-term market signals that provide certainty to investors.”

Despite international media adulation for investing public funds in the “industries of the future”, the UK fell back into recession in 2011. Facing falling tax revenue and rising feed-in tariff subsidies for solar panels, the government attempted to cut subsidies to spare slashing social spending. But the UK Supreme Court ruled cutting solar subsidies was “legally flawed”. Despite public protests, the government’s March 2012 budget cut $14 billion in child and welfare spending.