Minggu, 22 Juni 2014

Economic Uncertainty That Arises From Political Uncertainty

Although every single economic enhancement program launched by this administration has been a failure, you do have to give it credit for trying since the failures happened is so many different ways:

- Failure Type 1 - these failures spent a lot of taxpayer money to incentivize economicbehavior that would have happened anyway. Two prime examples are the Cash For Clunkers program and the First Time Homeowner Rebate program. While these two programs created a temporary blip in demand, once the incentives ended, demand fell below a business as usual expectation, indicating that demand was moved up but not created since the uptick in demand during the program was offset by the down tick after the program ended.

- Failure Type 2 - these failures were programs that did not even have the temporary uptick to any substantial degree. Cash For Caulkers, which provided monetary incentives to people who insulated their homes, and Cash For Appliances, which provided monetary incentives for people to buy new, energy efficient appliances, never get mentioned in the administration's list of accomplishments. This implies that they even recognize how lame these programs were.

Another component of this type of failure was the HAMP program which was supposed to get mortgage relief for homeowners in distress and having difficulty paying their mortgages. The program severely underperformed relative to its forecasted participation rate and for many homeowners that did participate, they ended up with worst mortgage plans than when they started, the exact opposite of the intended consequence of this program. The inspector general of the program himself called it a failure and it was quietly put to death without much fanfare.

- Failure Type 3 - This failure is focused mostly on the massive waste of money called the economic stimulus program. Remember, this administration claimed that if this economic stimulus program was not passed, unemployment could go as high as 8%.

Well, it was passed and unemployment has soared to 9% and beyond and has stayedhigh for months on end. Thus, relative to the stated objective of the program, keep unemployment well under 8%, it was an utter failure.

Recent Congressional Budget Office estimates put the cost of the stimulus program at about $830 billion. The administrationbelieves the program was a success since it claims the stimulus created about3 million jobs. However, if you do some simple math and divide the3 million jobs into the $830 billion cost, you end up with a cost of over $275,000 per job created, a ridiculous price to pay, assuming that 3 million jobs were even directly created by the stimulus.

Given what the stimulus money was wasted on, it is no surprise that it was an utter failure from an unemployment perspective and cost per job perspective.

- Failure 4 - this is an interesting and often overlooked type failure since it is self inflicted by the political class on itself. Back in the first quarter of 2010, the political class passed a $35 billion small business jobs incentive program. But listen to the comments after the bill was passed from various politicians (and reported by the Associated Press on March 4, 2010):

If the people who constructed and passed the legislation think it stinks, what chance does the bill have of being successful? With everybody bad mouthing it and having no confidence in it before it is put in place, $35 billion is wastedsincethe bill wasdead on arrival in the real world.

Wow, who thought that the political class could fail in so many ways? It would be comical if they were not wasting hundreds of billions of taxpayer dollars and driving us deeper and deeper into debt without any resultant benefit.

If all of these programs failed miserably, maybe it is time to take a totally different approach to managing the economy. The one area that the Obama administration and the political class has not tried is to do less, rather than more. Every time they do something, given their bungling, they interject more and more uncertainty into the market and economy. The last thing a business owner or operator wants in their business life is uncertainty. You can at least plan in a certain world, you cannot plan effectively in an uncertain world.

With high levels of uncertainty, retrenchment is a wiser business strategy than advancement. Consolidation is a wiser business strategy than expansion. Doing nothing is wiser than taking a risk. Certainty, even bad news certainty, is better than wide open uncertainty.

How has this administration and the political class as a whole contributed to uncertainty? The ways are many and wide ranging:

- For a year, the two parties viciously debated the merits and downside of eliminating the Bush tax cuts for people earning over $250,000 a year. Within that set of taxpayers aremillions of small businesses who file their business taxes within their personal tax returns who could en dup paying more in taxes. Given this uncertainty the political class injected into reality, will small business have to pay more in income taxes, small businesses went the safe route and did not hire since they did not know if they would have extra tax expenses.

- Continuing with the same insanity, when the political class finally decided to extend the Bush tax cuts for everyone including the rich, they could only agree on a two year extension. More uncertainty. What happens at the end of two years? Why should a small business owner hire more employees when his Federal income tax billcouldgo up significantly within two years? Better to stay put, business wise, until the uncertainty clears.

- There are not enough days to go into details about the uncertainty that Obama Care has injected into the thinking of all types of businesses but the uncertainty generally falls intofour categories:

The list goes on and on. And the truth is, no one, including the politicians who wrote the legislation, knows the answers to these questions. In the past two weeks we have seen totally unexpected bad consequences of this law arise as people plow through the 2,500 page legislation.

Given the people who wrote and hyped the law didnot foresee the latest snafus, it is highly unlikely that business owners and operators know what is going to happen either. More and more uncertainty.

The House Of Representatives Energy and Commerce Subcommittee had hearingsrecently on Obama Care. Presented at that hearing was a 3,500 page stack of forms, requirements, regulations, etc. that Obama Care has already spawned. No one knows what is going on or what will fall out of these 3,500 pages. More uncertainty.

- Boeing wants to move some of its airplane production from Washington state to South Carolina in order to be more competitive. More competitive means more business means more jobs. They do not want to move these jobs to South Korea. They do not want to move these jobs to South Yemen. They want to move them to South Carolina, totally within the continental United States and give them to Americans.

However, the Obama administration via the National Labor Relations Board has intervened and sued Boeing over the move. Why? The real answer is so that Obama can protect some union votes for himself in 2012 since the jobs being moved from Washington to South Carolina will less likely still be union jobs when the move is done. Pure politics, more uncertainty.

Why would a business plan and try to improve its business and expand employment when the heavy hand of the government could intervene at any time and stop the plans purely for political gain proposes? Why bother going through the motions to expand when the sword of interference and uncertainly could chop down like it did on Boeing? Better to just hunker down, stay within the current business plan and operations, not hire more people,and avoid the potential government interference.

Given that any proactive economic program this administration has come up with has failed, maybe it is time to change strategies.Rather than continuing to waste taxpayer money we should be looking to remove uncertainty from the market and let the market heal itself? Wasting money has not worked, no matter how it was spent or intended, maybe trusting the free market and private sector to act for its own good in a more certain business climate would work. There is no downside.

Zachary Karabell, writing in the July 4, 2011 issue of Business Week says the same thing better then me. His article examines the issue of whether government intervention in the market is a good thing. His conclusion:

"The government is one vital element among many, and society will thrive only when neither too much or too little is expected of it. This may not be as stirring as revolutions and crusades, but its better to accept limitations and work constructively within them than pin our hopes on policies such as the massive attempts to juice consumption that the U.S. government has repeatedly tried - and are bound to disappoint. Bold plans with no chance of success won't change employment patterns or make a nation competitive in a global system that is increasing complex and dynamic. Today's leaders need the humility to recognize what they can't change so that they can meaningfully change what they can."

Well said. And what they can change is to stop bickering over voting blocs, stop bickering over tax plans, stop bickering over programs that are doomed to failure, have a little humility, and start injecting some sound long term planning into the economy which would remove the blockade of uncertainty without wasting hundreds of billions of taxpayer money.

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