Sunday, June 27, 2010

Coming soon: 2011 - An Obama induced economic disaster... Unfortunately it's not a movie!

By all accounts it appears as if we are finally coming out of the recession. We’ve had three quarters of positive economic growth, corporate profits have taken off like a rocket ship, job losses have been stemmed and the stock market is up 20% in the last 12 months. Despite all of the carping about the progressive Barack Obama and his seemingly anti-capitalist administration, things actually look pretty good.

There is a word for that rosy image... it’s called a mirage. While ostensibly all of the above is true, they bear very little relevance to what is actually going on in the real economy, or more importantly, in the real lives of Americans. If you thought 2009 was a tough year, just wait until 2011 arrives. Next year is going to make last year look like a cakewalk.

Why? It’s rather simple actually. Despite the obvious exception of their putting Barack Obama in the White House, Americans are generally rational people. Rational people react to incentives. When Cash for Clunkers offered consumers $4,500 to trade in their old cars on something new, sales took off. ( reports that the true cost of the program to taxpayers was $24,000 per car!) This year when the government offered an $8,000 tax credit for buying a home, not surprisingly, home sales leapt.

If we were to leave things there then there would be no problem. (Assuming we skip the fundamental problem of government taking from some taxpayers to incentivize others to do its bidding…) The problem arises when we look at what happened after those programs ended. In September 2009, the first month after Cash For Clunkers ended, auto sales collapsed by 42%. In May of this year, the first month after the homebuyer tax credit expired, home sales dropped 2.2% and new home sales plunged to their lowest level since 1963. The decline would have been greater but buyers were busy closing on the homes bought under the program.

Now, imagine that chaos across the economy… That is exactly what we are headed for in 2011. Why? Again the answer is rather simple: Government. This time it’s taxes with a little regulation mixed in. Next year the United States is going to see a confluence of tax and regulatory increases that are going to deliver a body blow to the economy. Businesses large and small, are going to be hammered, and given that most jobs emanate from businesses, that will translate into fewer jobs. Here is a quick snapshot, and these are just the federal taxes, we’re not even talking about state here…

The Bush tax cuts are going to be allowed to expire, and the resulting top income tax rate will increase to 39.6%, up from 35%; dividend tax rates will soar to 39.6% from 15% while the capital gains tax rate will jump from 15% to 20%. For families of small business owners insolent enough to die in 2011 rather than 2010, the estate tax will take 55% of the estate, up from 0% today. Not only does death provide no reprieve from taxes, but apparently neither does paying taxes to foreign governments, as the administration is seeking to eliminate the foreign income tax credit, which would subject income taxed overseas to additional US taxes.

The impact of these taxes will be far wider than the administration would lead you to believe. They tout the fact that these tax increases will only impact individuals making over $200,000 a year or families making over $250,000. The first point they don’t mention is that corporations simply turn around and pass any tax increases on to their customers. From auto companies to toothpaste manufacturers to retailers, corporations get their tax dollars from their customers. Fundamentally taxes are paid by people, not corporations, and the more taxes they pay the fewer dollars they have to spend in businesses that employ people to provide goods and services. Secondly, the administration doesn't tell you that most small businesses in the United States, where more than 80% of all new jobs are created, are owned by people in that $250,000 - $1,000,000 per year tax bracket and they file their company’s taxes on their individual returns. To the degree that higher taxes make it more difficult to start, maintain or grow their businesses profitably, they will be hiring and employing fewer workers. Again, the impact is felt far beyond the “rich” the administration loves to vilify.

Those coming tax increases explain the positive economic news that started this piece. Corporations are like individuals in that they typically act rationally as well… again, with some obvious exceptions such as their support for ObamaCare and stimulus spending. Nonetheless, in an effort to escape the higher 2011 tax bite, companies have been doing whatever they can to accelerate their income into 2010. From slashing costs to repatriating foreign earnings to manipulating sales cycles, the growth and profits we are seeing now are the result of corporations acting as consumers did with Cash For Clunkers and the homebuyer tax credit.

At the end of the day, (or year in this case...) the combination of these tax hikes with the new regulations associated with ObamaCare (2,000 pages), financial reform (1,900 pages) and whatever else the administration can muscle through before they lose Congress in November will be nothing short of devastating. If unemployment is sitting at almost 10% when companies are actually spending money, building inventory and generating revenue from a trillion dollars in federal stimulus spending, what will it be when they pull step back as a result of these taxes and red tape? From outsourcing jobs to moving corporate headquarters to low tax domiciles to demanding increased productivity out of their current employees – resulting in decreased hiring – companies of all sizes react to incentives, particularly tax and regulatory increases. Don’t be surprised if 2010 turns out to be just the eye of the storm.

If you think the Obama administration made a mess of the Gulf oil spill, wait until the country gets hit with the coming Category 5 economic storm they are creating. One wonders if enough time will have passed that they will feel sufficiently abashed about blaming George Bush. Don’t count on it.

Sunday, June 20, 2010

Obama's FCC & FTC tag team to "subjugate" the Internet

After a year and a half of demonstrable success in areas from robust job creation to fiscal restraint to disaster management, the hubris in the Oval Office has the Obama administration setting its eyes on controlling the single most important economic, social and political tool since the Guttenberg Press – the Internet. What could go wrong?

Last week FCC Chairman Julius Genachowski and his fellow Democrats decided to take a significant step toward gaining that control by opening for public comment their proposed changes to Internet regulation. The FCC currently classifies Internet service providers as information services, which prohibits significant government regulation. Genachowski seeks to classify them as telecommunications services, which would give the FCC a much stronger regulatory hand. This change of classification would likely result in strict government regulation of the Internet, despite the Chairman’s promise to rule – er… regulate with a “light touch”. Combine that with May’s draft report from the Federal Trade Commission considering such options as rewriting copyright law to favor of print media, creating a “journalism” division of AmeriCorps, or taxing Internet devices to support newspapers, and the future doesn't look particularly rosy for all things Internet related.

The Internet has flourished over the last decade precisely because it has been largely unregulated. Ten years ago the Internet was a much different place. Video was almost non existent, Flash was still just a DC comic book and the shrill noise of a dial-up connection was as common as the percolating of a coffee maker in the morning. While there was some talk a few years ago of the government taxing email to control SPAM, the ‘net has thankfully been largely unregulated. Can one imagine if the bureaucrats who gave us the $600 Pentagon toilet seat, the 70,000 page tax code, Amtrak, the National Park Service's six figure outhouses – dollars not seats – Hurricane Katrina debit cards or Cash for Clunkers being in charge of how we connect to the Internet or what we can see? While everything that has been tried on the Internet has not worked, the beauty of the unregulated marketplace is that failures are indeed allowed to fail and something better is developed to replace them. In 2010 not only do government agencies never get shuttered for failure, but the mindset of supporting failures now reaches beyond government into areas like banks, insurance companies and auto companies. I have no doubt had government been involved Facebook would never have seen the light of day because Friendster would have received some sort of subsidy from this agency or that; Messenger & Skype would have been smothered in their cribs by standards and fees; Amazon would still refer to the river as would have failed, having been saddled with regulations intended to support struggling brick and mortar bookstores and of course we'd all still be using AOL disks as dial-up access would have been granted protected from broadband’s unfair competition.

Which brings us back to Emperor Julius Genachowski and the Obama administration’s desire to control the Internet. By using the red herring of “equal access” under the guise of Net Neutrality, they plan to fundamentally change the way the Internet works. While ostensibly this change is just an innocuous step that will allow the FCC to ensure that all content has equal access as well as expand broadband penetration, soon thereafter it will morph into something far more sinister. How long will it be before FCC Diversity Czar Mark Lloyd decides who gets to publish websites? Before the next Anita Dunn decides who is a legitimate news organization – and therefore deserves 1st Amendment protection? Before White House Chief of Staff Rahm Emanuel can send FCC agents to visit bloggers who deign to be critical of the administration rather than utilize his more pedestrian dead fish methods?

Government by its very nature is rapacious. Not only that, its effects become increasingly negative the more it grows. Our Founding Fathers understood that and none other than Samuel Adams and John Hancock felt sufficiently strong that it must be controlled that both were willing to sacrifice the creation of the United States itself if explicit limitations – in the form of the Bill of Rights – were not introduced. Today, even if government never passed another law or no bureaucrat ever issued another regulation, our government is far more intrusive, dysfunctional and pernicious than Adams or Hancock could ever have imagined.

At a time when the United States is in the throes of trying to dig out of an economic malaise and unemployment is flirting with double digits, one must ask what is the Obama administration thinking to try and regulate the one dynamic part of the economy which is actually working spectacularly well and provides a conduit to success for so many others? Is now really the time to put the future of the Internet, the single greatest tool in human history for the dissemination of information – including government oversight - in the hands of nameless, faceless government bureaucrats who have absolute control, issue illogical regulations, impose arbitrary standards and have no fear of retribution from those whose lives and livelihoods those actions impact? Only if your real goal is to put the Internet in your pocket, control it, and limit its viability as an outlet for those who don’t’ agree with you. Actually, when you put it that way it all makes sense coming as it does from the Obama White House.

Monday, June 14, 2010

Surprise: It turns out Barack Obama's not even a very good Community Organizer

In 2008 many people asked whether or not Barack Obama was qualified to be president. Not in reference to his birth certificate, but rather to his lack of executive experience. The President of the United States after all, is the CEO of a rather large and powerful organization and it might not be the best place in the world to get on the job training. During the campaign however, when queried about his lack of executive experience candidate Obama was unequivocal in establishing his bonafides in hopes of assuaging any concerns: In a Democratic debate in February he suggested he would make a good leader: “I can bring this country together, I have a track record, starting from the days I moved to Chicago as a community organizer.” Later he told 60 Minutes: “I've run my Senate office, and I've run this campaign.” and CNN: “We have got 2,500 (employees) in this campaign… You know, we have a budget of ($36 million) …just for the month. So, I think that our ability to manage large systems and to execute, I think, has been made clear over the last couple of years." Of course the proof is in the pudding, and his campaign was indeed successful. On the “Community Organizer” deal we’re not so sure.

On its face, one would imagine that at a minimum the job of a “Community Organizer” would be to do things that organize the community and make it better off. In practice it seems to entail finding a group of people who share some geographic, economic and or demographic traits who simultaneously are certain that someone else is responsible for whatever misfortunes they may be experiencing. The “Community Organizer” then proceeds to stir the group up and proceeds to use intimidation and strong arm tactics in conjunction with groups such as ACORN or SEIU to extort money or other bounty from corporations or taxpayers. By his own measure, Barack Obama was a successful Community Organizer.

The question is however, how does that “success” as a Chicago “Community Organizer” translate into success as the President of the United States? To make this simple we’ll focus on just one opportunity. Of course I’m referring to the BP spill, and I’m not referring to the actual leak itself. Not that it’s not important, but that is something the President truly has little direct control over. No, I’m referring to the effects of the spill on the “Community” of the Gulf Coast. If “Community Organizer” actually means anything, it must at least mean helping a community deal with difficult situations of this scale. One would expect with the resources available as the President of the United States such assistance would be vast, rapid and efficient Not so much.

Three days after the sinking of the Deepwater Horizon, the Dutch government offered help in the form of ships outfitted with oil skimming booms with the potential of collecting more than 1,000,000 gallons of oil a day. The administration said “Thanks, but no thanks”. On May 2nd Louisiana Governor Bobby Jindal requested from the federal government 3 million feet (about 600 miles) of absorbent booms to help protect the Louisiana coastline and marshlands. Two weeks later less than 800,000 ft of booms had arrived. Four weeks later, on June 7th the Governor stated that there were still not sufficient booms to help protect the state’s beaches. And it was not because there were none available. John Lapont, the owner of Packgen, a Maine company that manufactures booms has been all over the news telling anyone who will listen that they have 80,000 ft. of booms in their warehouse ready to ship and have ramped up capacity to 90,000 ft (18 miles) a day. He first contacted BP and the government in early May and by June 7th still had not shipped a single foot. And Packgen is only one of many companies who have contacted the government and BP with proven tools to help mitigate the damage to the Gulf Coast.

Even when it’s just federal government permission they are seeking to help themselves, things still don’t work. On May 11th Governor Jindal requested permission from the federal government to build sand berms to protect the state’s coastline. As if studying both sides for a debate class, the administration dithered and worried about the hypothetical impact of building the berms rather than focusing on the actual threats quickly moving towards the shore. Finally an exasperated Jindal announced on May 23rd that Louisiana would build its berms with or without federal approval. In record speed the administration bolted into action and a mere 10 days later the federal government finally approved the building of said berms.

These are but three small examples that put the lie to the notion that President Obama’s time as a “Community Organizer” provided him with sufficient executive experience to be a competent President. To make matters worse, on June 1st Attorney General Holder announced that the federal government would be conducting a criminal investigation into the circumstances surrounding the spill and that if any BP personnel broke any laws they would be prosecuted to the fullest extent of the law. If this was not pure buffoonery I’m not sure what is. Here, in the midst of the greatest environmental disaster in American history, just when it’s metastasizing into a full blown economic calamity and human tragedy, the President and his minions threaten to jail the very people who they are depending on to solve the source of the problem in the first place. If BP personal were less than forthcoming before, phone calls from their lawyers telling them that any utterance they make could be used against them will no doubt start them singing like canaries.

Rather than an “ass kicking” “Community Organizer” what the country really needs is someone who knows how to solve problems, like Apollo 13 flight director Gene Kranz. (Ed Harris played him in the movie.) When the trouble started Kranz pulled together the biggest brains he could get his hands on and stuck them in a room with all the materials available to the astronauts in the damaged spaceship. He told them they were not coming out until they figured out how to use those materials to put together a rescue plan. They came up with a plan and it was one of the greatest triumphs of American ingenuity in our history. Forty years later, given the potential damage to the environment, the economy and most importantly, to the lives of the Gulf Coast “Community”, President Obama should have pulled a Gene Kranz with the goal of mitigating the damage from the spill. Even if one buys the administration’s argument that BP was lowballing the amount of oil released so they (the administration) didn’t know the real potential damage until the end of April, they had plenty of time to pull together the expertise and resources necessary to mitigate much of the damage that was easily foreseeable. From hay and hair as oil sponges Dutch skimmers to setting the oil on fire to letting Bobby Jindal build whatever berms he felt were necessary, there were a wide range of actions this administration could have taken to avoid this accident from becoming a disaster. They didn’t and it shows…

When all is said and done, President Obama is not responsible for the explosion at the bottom of the Gulf. He is however very much responsible for the environmental, economic and human disaster it has created. The dithering and ineptitude demonstrated by his administration sits squarely on his shoulders.

Right now millions of Gulf Coast citizens might even settle for a remotely competent “Community Organizer” who might be able to actually help their communities. It turns out that despite being adorned with all of the trappings of the Office of the President and vested with all of its requisite power, President Obama isn’t even very good at the one thing he told us he was. So much for truth in advertising.

Monday, June 7, 2010

Government jobs strangle economic growth...

There are some things that are true regardless of what anyone tells us. OJ Simpson’s actual guilt at killing two people in a Brentwood doorway was not impacted by whatever verdict the jury might have returned. Armando Galarraga pitched a perfect game regardless of the call Jim Joyce made. Socialism and statism are destroying the United States, regardless of what Democrats, progressives or anyone else tells you. Not that it matters a great deal in the end, but there is a distinction between the two – socialism & statism. Fundamentally socialism seeks state ownership of the means of production and distribution of goods and services. Statism seeks government control over the same and more, only without requiring state ownership. Both are fatal for a dynamic economy and increasingly in the United States we are experiencing more of both.

Does any of this matter? Only if you want to have a country that has dynamic economic growth and living standards that move in a positive direction. Government may be good at creating jobs, but the kinds of jobs it creates are anything but dynamic and add little to the growth of the economic engine that drives an economy. Think about the things that have changed your life over the last quarter century. What names come to mind? Apple, Microsoft, FedEx, Wal-Mart, Google, Southwest Airlines, DirectTV, CNN, Marriott, Drudge Report, eBay, Rush Limbaugh, Toyota, Dell, Starbucks, Amazon, Facebook, Home Depot, Pixar, Outback Steakhouse. Like them or hate them, while some may have had more of a direct impact on your life than others, all are associated with organizations that have brought innovation in goods or services to much of the population across the country. Most are highly profitable and employ thousands of people. Now think about areas of government involvement over the same period and what comes to mind? Post Office, Amtrak, IRS, Social Security, Medicaid, Medicare, education, immigration. How do they perform? And those are just areas where the government has direct control. Think about the areas where they have significant indirect control such as healthcare, energy and financial services. While there may have been some advances in these areas, the trajectories are far different than the first list above.

Telephony makes a great metaphor for our larger economy. For almost 100 years there was essentially one phone company in the country, AT&T, and you would not exactly call Ma Bell a great innovator. The phone you had in 1982 when Judge Green decided to break up AT&T’s (government sanctioned) monopoly was probably not much different than the one you might have had 40 years before, except the rotary dial model may have been replaced by a push button model. It was only when the government decided to take a step back (or ½ step as the case might be) from the regulatory stranglehold it had on telephony did the choices of providers, features and platforms skyrocket to where they are now.

America is in the process of reversing our experience with telephony, only on a much larger scale. The continuation and acceleration of government intervention in our economy portends an America in decline. While an economic collapse is not written in stone, the concrete is quickly hardening as we increasingly come to resemble the failed socialist states of Europe. Nearby is a table from May of 2009 that looks at job creation for the prior decade. The numbers are staggering. Literally, every single one of the 3 million net new jobs came from government programs. In areas where government exercises direct or indirect control there were 6.9 million jobs created and in areas where the government exercises relatively little control there was a net loss of 3.7 million jobs!

The problem with those numbers is that it is innovation that drives economic success and those jobs do not innovate. (Although it was DARPA who started the Internet, it was private companies who did the yeoman’s work of building and developing the infrastructure and content that has made the web so successful.) The typical government employee spends their time shuffling and filing paperwork, expanding red tape and enforcing regulations, attempting to educate students and mailing checks to the tens of millions of Americans whose income is dependant on government welfare. They are not inventing new types of fuel, developing medicines cutting edge computer programs, creating and marketing new Internet offerings, starting the next McDonalds or even inventing the next Snuggie, ShamWow or George Foreman grille.

And the government jobs are only half the problem. The other half comes from the ever increasing regulation of the private sector. Be it automobiles, healthcare, finance or soon to be restaurants, companies in heavily regulated industries can hardly make a move without first getting the approval from the government – often from numerous agencies. This can be even more onerous than actual government control over an industry because in this type of a situation the government doesn’t even have to pretend to try and figure out how to pay for whatever regulations they write. They simply issue and edict and the corporations must comply. Here again, government intervention greatly distracts corporate America from doing what it does best, which is innovating and finding the best possible manner in which to serve their customers and earn profits for their shareholders.

Virtually every single thing that turned the United States into the greatest economic engine in human history came as a result of private companies pursuing private opportunities. Sometimes those pursuits flamed out like the Tucker automobile, FedEx’s Zapmail, Motorola’s Iridium or Often enough however some entrepreneur or company takes a leap of faith that ends up not only succeeding, but ends up surpassing their greatest expectations: Howard Johnson during the Depression, Ray Kroc bringing the McDonalds Brother’s ideas to the whole world or Jeff Bezos thinking he could sell books online. To the degree that government at all levels strangles the economic engine that has powered our success, we can look forward to a diminishing future and an economy that is less able to respond to the needs of the citizenry, less able to provide revenue for the constitutional functions of government, and perhaps most despairingly of all, fundamentally incapable of advancing the human condition… other than the conditions of the bureaucrats who will run everything.