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Monday, November 10, 2008

"Circuit City Unplugged, DHL Shipping, and GM in Reverse"

It seems we are undergoing the process of creative destruction, a term coined by economist Joseph Schumpeter to describe the event where, much like natural selection, companies that are profitable survive and those that are not...don't.

As of this morning:
  1. Circuit City has declared bankruptcy,
  2. DHL is abandoning its shipping and ground services in the United States and , hence 9500 jobs,
  3. and General Motors has been significantly downgraded as analysts predict GM will not have the minimum required cash flows of $11 billion in the first quarter 2009.

Talks are spreading about a potential bailout for the major automakers, as Ford's position is deteriorating as well. This would not be the first time for these automakers to call on the government, nor will it be the last with current business strategies and projected financial performance. So what do we do? Do we bail them out and if so, for how how long?

I hope that no one disagrees that these three companies qualify as big business. In the same manner, I don't think anyone would descibe the automakers' struggle as news. Would you give an inefficient business a handout? Remember, there are many jobs at stake which turns heads in Washington.

A viable solution could be a tax cut across the board. In effect, this would free up cash for many firms, large and small. Perhaps some big business will use this cash effectively and remain in business. Others will fail. This option puts responsibility on the business to be productive as to the taxpayer-funded counterproductive behavior.

"Community Service REQUIRED in an Obama Administration"

Mankiw influences change in Obama policy...

From the President-elect's website:
The Obama Administration will call on Americans to serve in order to meet the nation’s challenges. President-Elect Obama will expand national service programs like AmeriCorps and Peace Corps and will create a new Classroom Corps to help teachers in underserved schools, as well as a new Health Corps, Clean Energy Corps, and Veterans Corps. Obama will call on citizens of all ages to serve America, by developing a plan to require 50 hours of community service in middle school and high school and 100 hours of community service in college every year. Obama will encourage retiring Americans to serve by improving programs available for individuals over age 55, while at the same time promoting youth programs such as Youth Build and Head Start.

In the past, economists of both the right and left opposed the military draft. Will they similarly come together to oppose conscription for community service? I hope so.This initiative brought to mind the opening passage of Milton Friedman's Capitalism and Freedom:

In a much quoted passage in his inaugural address, President Kennedy said, "Ask not what your country can do for you -- ask what you can do for your country." It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny. The organismic, "what you can do for your country" implies that government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.

The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather "What can I and my compatriots do through government" to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect?

Update: The presidential transition website to which I linked above no longer uses the word "require." The passage quoted above was copied and pasted from that website (with bolding added by me). But within a few hours after I posted it here, the wording changed to "setting a goal."I am delighted to see this blog having so much influence on the policies of the new administration.

That's change I can believe in!Addendum: Click here for a shot of the original webpage.

Sunday, November 9, 2008

"Mankiw's Message to President-Elect Obama"

President Bush's former chairman of the Council of Economic Advisors and Harvard Professor Fregory Mankiw has a message for President-Elect Barack Obama.

Congratulations, Senator Obama. You ran a good campaign, and you racked up an historic victory. As you get ready for your new responsibilities, let me suggest four ways for you to become a reliable steward of the economy:

Listen to your economists. During the campaign you assembled an impressive team of economic advisers from the nation’s top universities, including Austan Goolsbee from University of Chicago and David Cutler and Jeff Liebman from Harvard. Your campaign’s director of economic policy, Jason Furman, is a smart, sensible, and well-trained policy economist. I know: He is a former student of mine.

Pay close attention to what they have to say. They will often give you advice quite different from what you will hear from congressional leaders Nancy Pelosi and Harry Reid. To make sure you hear the views of your economists, put them in offices close to yours. Tell your chief of staff to invite them to all the relevant meetings.

Embrace some Republican ideas. No party has a monopoly on truth. Be ready to take the best Republican policy proposals and make them your own, as Bill Clinton did with welfare reform in 1996.

Health policy is a case in point. Over the past several months, you lambasted McCain’s proposal to reform the tax code to include a refundable health insurance tax credit. Did you know that long before McCain ever proposed this idea, it was advanced by Mr. Furman, your campaign’s policy director? He can explain to you why the Furman-McCain plan makes a lot of sense.

Now you may decide that this plan does not go far enough. You may want a more generously funded social safety net to help the less fortunate get health care. Fair enough, but in pursuing that goal, you run into the next issue.

Pay attention to the government’s budget constraint. The nation faces a long-term imbalance between government spending and tax revenue. The fundamental problem is that the federal government has promised the elderly more benefits than the tax system can support. This fiscal imbalance will become acute as more baby boomers retire and start collecting Social Security and Medicare.

Yet during the campaign, you promised that you would cut taxes for 95 percent of Americans, that you would vastly expand health insurance coverage, and that you would never cut Social Security benefits or raise the retirement age. You will almost surely have to renege on some of these promises. As your economic team will often remind you, even if the laws of arithmetic are ignored during campaigns, they provide a real constraint when making actual policy.

Recognize your past mistakes. As a new senator, you voted along predictable left-wing lines. As president, you will need a more eclectic, nuanced approach.

Take trade policy, for example. In the senate, you voted against the Dominican Republic-Central American Free Trade Agreement. You opposed free trade agreements with Colombia and South Korea. You supported Senators Charles Schumer and Lindsey Graham in their quest to put tariffs on Chinese goods if China failed to revalue its exchange rate. You supported the Byrd Amendment, which encouraged domestic companies to file anti-dumping suits against foreign competitors. You supported subsidies for domestic producers of corn-based ethanol and tariffs on imports of more efficient sugar-based ethanol.

Your economists can explain to you why these positions were wrong-headed. Economic isolationism is not in the national interest. A high point of the Clinton presidency was the enactment of the North American Free Trade Agreement, which passed both the House and Senate with a majority of Republicans and a minority of Democrats.

This past Tuesday, many people voted for you hoping you would achieve the kind of economic success that Bill Clinton enjoyed in the 1990s. Your best chance of delivering what they want requires that you abandon some of your past positions and pursue a more moderate, bipartisan course.

Friday, November 7, 2008

"Time to Come Together"

Our country is facing many challenges. For many, including myself, there is much concern over the recent election of Barack Obama. What direction will he take our nation? What condition will he leave our country when his term in office ends?

We must unite as Americans to address these challenges. We cannot afford to be remorseful, but rather we need to be keen and share our voice with others. Perhaps this is an opportunity to open the American eyes to how socialist policies are not the path to U.S. global economic leadership but a path to global economic complacency. This could be what the United States needs to quell the desire for far left policies and restore an America based on its founding principles.

There are some things we can do. First and foremost, we can pray for our nation. As our country is moving in a direction to further separate our religious convictions from national policy, we can pray that our nation's true values will survive the far left's governance.

We don't often think of it, but a branded memory from my childhood education was saying the "Pledge of Allegiance" every morning. That is only one generation away from being forgotten! Not that saying the "Pledge" will save our country, but if reciting the "Pledge" is wrong as it has been deemed, what subtle changes can we expect in the future?

Second, we must listen to understand! I can even admit at face value that liberal policies seem attractive. Giving money to those who need it most, providing free health care to everyone, and giving everyone a college education are good things! They are... at face value! But we must communicate the consequences. Many of there arguments end here... at these face value statements. Look at many press articles and liberal activist statements that support these policies. Notice they don't include solutions and most do not understand the economic implications.

We can listen. We can understand. And we can explain the economic consequences of these actions.

In "An Age of Turbulence,"Alan Greenspan spoke on capatalist economics in Moscow to an audience of socialist economists in the early 1990's. He was surprised by their conceptual understanding of capitalism that was evinced in the follow-up question-and-answer session. Later, he engaged one of these economists on his knowledge of capitalism. The economist replied that economics is a science of numbers, formulas, and solutions. There is truth and freedom in numbers. He was implying the political freedom of economics.

Last, become active in communicating these values. We have many opportunities for this type of discussion. Let's take advantage of them. There were once times in this country that these were the only issues at the table. Now, it seems they have been taken completely off the table.

I will begin blogging about what will happen to our country in many respects under a socialist regime. Topics on the table include education, health care, taxes, along with many others. Perhaps these can serve as some tools based on facts to communicate your positions. As always, I would appreciate your continuous feedback.

Sunday, November 2, 2008

"CNN Removes Obama Story"

Barack Obama's aunt has been residing in Boston illegally for the past four years. This story appeared on CNN Sunday morning yet was removed from the headlines by early afternoon.

The media has faded into an immoral abyss misleading and taking advantage of the American people. CNN and NBC,in particular, have consistently misreprepresented the facts throughout this election. A seemingly "fair" McCain headline on CNN.com seems to always include anti-McCain sentiment and pro-Obama rhetoric within the story. The latest disenfranchisement of the American people occured today when CNN withdrew the Obama headline and conceal a story the American people deserve to be aware of.

Barack Obama declared he was unaware of "Auntie Zeituni's" (how he refers to her in his memoirs) status as an illegal alien. Apparently within a single day, the Obama campaign can uncover detailed tax information on "Joe the Plumber" but after nearly two years running a presidential campaign, they are unaware Barack Obama has an aunt living illegally in the United States.

Please pray for our country this week as we determine who will lead us over the next four years. Let us trust that whoever is elected is part of HIS plan for our country.

"Economist Thomas Sowell Fears Obama Presidency"

Acclaimed African-American economist Thomas Sowell fears an Obama presidency and equivocates it to an American historic disaster! Read for yourself.

http://www.realclearpolitics.com/articles/2008/11/ego_and_mouth.html

Saturday, October 25, 2008

"Incentives Matter"

Nearly every decision we make is driven by incentives. Why do we go to work? To receive a check every two weeks? Why did we spend $40,000 on a college education? Surely, because we believe it’s a good investment in the long run. What happens if these incentives were taken away? What could you expect to see in our economy?

In "An Age of Turbulence" Alan Greenspan recalled visiting the Soviet Union. At the time, the Soviet Union was an economic superpower and the two great competing economic theories were still in the midst of the Cold War. Greenspan recalls the Soviet finance minister assigning a senior aide to him with the task of explaining the centrally plan economic system.

Greenspan noted the complex and mathematically sound algorithms the Russians used to interpret their economy. He noted their "dazzling" mathematic capabilities. He remembers leaving the Kremlin in 1989 and seeing a farmer driving 1920 model steam tractor. He asked a security official, "Why do you suppose they still use that?"

Thinking little of it, the official said, "Because it still works?"

There was a similar conundrum after the fall of the Berlin Wall between communist East Germany and the democratic West Germany in 1989. In terms of GDP, East Germany only lagged West Germany by 15% to 25%. However, according to Greenspan, visiting both nations evinced a much larger difference in the standards of living. West Germany was at the leading edge of technology and East Germany was lagging. For example, there was a significant difference in the 1950 Mercedes and one built in 1988 in West Germany. However, the East German Trabant hadn't changed its design in over 30 years! East Germany never had the incentive to change in a centrally planned system.

There are many incentives to work: to provide for your family, to purchase property, to have health insurance, etc. To have increasing work opportunities, many spend longer in school to increase the probability of securing the many benefits of work. However, if these benefits are given away, truly how valuable are they?

If your idea of the "American Dream" is to earn property, health insurance, and a high quality of life, then perhaps you sacrificed dearly to earn an education and increase the probability of having these things. The sacrifice could be in time, long hours of work and studying, or a hefty student loan. If the government gives these benefits away for free - in the forms of wage increases, health insurance, or education subsidies - it discredits what you have worked so hard for. We will lose incentives to create the best, to provide the best, and to be the best.

-Reflection from "The Age of Turbulence" by Alan Greenspan

Friday, October 24, 2008

"You're Not the Only One: The Global Economic Downturn"

The U.S. isn't the only economy hurting and Tom Petruno highlights the global economic phenomena in an article today in the LA Times. Many global markets peaked in mid-2007 and have lost over 50% of their value since.

Here’s a sampling (not meant to be all-inclusive):

Markets down more than 70%: Vietnam (-70.5%), Peru (-73.2%), Ireland (-73.4%), Russia (-73.9%), Iceland (-88.7%).

Markets down between 60% and 70%: Hong Kong (-60.1%), Poland (-62.6%), China (-69.8%).

Markets down between 50% and 60%: South Korea (-54.5%), Italy (-55.2%), Egypt (-56.9%), Brazil (-57.2%), Japan (-58.1%), Singapore (-58.2%), Turkey (-58.5%), India (-58.3%).

Markets down between 40% and 50%: Great Britain (-42.3%), Australia (-43.3%), U.S.-S&P 500 (-44.0%), Spain (-46.4%), Germany (-47.0%), Mexico (-48.3%).

Petruno also notes that the dollar has regained some strength in recents months, making the burden for those with international investments even more difficult to bear.

See full article at:
http://latimesblogs.latimes.com/money_co/2008/10/heres-a-club-no.html

Wednesday, October 22, 2008

"Health Care: Progressive Change in a Digressive Direction"

It seems as though our leaders are lost at sea when it comes to addressing health care in America. In the 2nd debate with John McCain, Barack Obama declared he believed it is a right of every American to have health care. Barack Obama believes every American has the right to the same health care plan that members of Congress receive.

Let me first provide a few facts about our healthcare funding. Currently, Medicare is an enormous tax burden but future burden will break America’s back. This statement comes directly from the Trustees of Social Security and Medicare trust funds.

“If the Trustee's projections prove a reliable guide to the next few decades, absent an increase in earmarked sources of revenue for the program, in just 15 years payment of currently scheduled Medicare benefits would require General Fund transfers equal to 25 percent of Federal income tax revenues (projected at their historic level of GDP)—more than triple their 2005 fiscal burden—and less than 10 years later the General Fund transfer would equal nearly 40 percent of Federal income tax revenues.”[i]

The numbers are shocking! Consider even further the following facts:

1) In 1962, TOTAL programmatic spending on programs such as welfare, social security, and medical programs amounted to 32% of overall tax revenues.

2) Today, the same spending amounts to over 60% of tax revenues.

3) Today, Medicare accounts for roughly 16% of overall tax revenue outlays.

4) As mentioned above:
a) In 15 years – 25%
b) In less than 25 years – 40%

So, hypothetically, in 25 years 84% of all tax revenues will be going to social programmatic spending! That is, 60% today plus 24% (the difference between Medicare today and 25 years from now).

Note that these figures are on top of Social Security funds having a negative balance beginning in 2018 and being completely exhausted by 2038! Barack Obama has already ostracized conservatives for cutting back on Social Security expenditures. The only other way is to increase taxes!

If I were the President of the United States, I think now is a great time to announce free, government-sponsored, taxpayer provided health care for everyone! However, back here in reality, the government does provide everyone health care. Granted you may have to go to the emergency room, but you will not be turned away. Apparently, that is still insufficient.

It is time to come up with solutions, so what are they?

Notes:
[1] Social Security Administration. “Message to the Public.” 2006. <www.ssa.gov/history/pdf/tr06summary.pdf>

Wednesday, October 8, 2008

"Energy Independence: The Task Ahead"

“Energy independence” is touted as the policy that can liberate the United States. It is the omnipotent policy that can rescue America from the financial crisis, the war in Iraq, and global warming. Both candidates in the 2008 Presidential election, John McCain and Barack Obama, are seeking energy independence just as Gerald Ford and Jimmy Carter did in 1976. It is noteworthy that 35 years after the 1973 Arab oil embargo and President Richard Nixon’s “Project Independence”, we are still trying to address the same issues. In a nutshell, although authors are capitalizing on proposed solutions to the energy question on the shelves of your local Barnes and Noble bookstore, the task of achieving energy independence is far more complex.

Since 1970, much has been done to address the energy crisis – from price controls, the Synthetic Fuels Corporation, to Reagan deregulation, and now two wars in Iraq. Much of this may not seem significant, particularly because the problems continue to persist today. But the fact is that the issues have been before the House of Representatives and the Senate for over 35 years and the U.S. has not progressed, but digressed if its goal is energy independence. As show in the chart below, in 1973, the U.S. imported 36% of the crude oil, and petroleum products consumed. In 2007, that same figure was 65% or nearly double the 1973 mark.


Graph 1 – Derived from Energy Information Administration, “U.S. Crude Oil and Petroleum Products Imports from All Countries (Thousand Barrels per Day)”. Released 9/30/2008. http://tonto.eia.doe.gov/dnav/pet/hist/mttimus2a.htm

The U.S. has not made any significant progress in 35 years to attaining energy independence yet another presidential candidate, Barack Obama, has guaranteed energy independence in ten years. I am an optimist. I believe the U.S. can become energy independent. However, I am also a realist. Let me explain further. In the figure below, the Government Accountability Office shows in U.S. energy sources by percentage.
Figure 1 – Source: Government Accountability Office, “Department of Energy: Key Challenges Remain for Developing and Deploying Advanced Technologies to Meet Future Needs,” December 2006, 9 (GAO-07-106).

Between 1973 and 2004, the only significant change where the U.S. derives its energy and relieves its dependence on fossil fuels is through nuclear power. Despite our numerous efforts, renewable energy sources remain unchanged. As shown in the table below, renewable energy accounts for less than 7% of U.S. energy needs in its projections for 2030! Even under conditions of high economic growth, the EIA estimates that renewable energy sources will not even make up 8% of our needs by 2030! But leaders still claim this can be done in 10 years!

Table 1 – EIA Annual Energy Outlook. Report #:DOE/EIA-0383(2008).

The idea of energy independence is driven by multiple forces. For electrical power generation, the U.S. has an abundance of coal; however, coal emits more carbon dioxide than any other source hence contributing to global warming. Nuclear power is emission free; however, it creates waste that requires careful handling and meticulous methods of disposing it safely. We face a catch-22: Do we use an abundant resource that emits carbon dioxide or emission free uranium that creates a dangerous radioactive waste? The energy issues revolving around power generation are not as salient or dire as those involving oil and the transportation sector. For power generation, in 2007 the U.S. had 16% excess generating capacity and anticipated generating increases of less than 2% per year.

Oil is the primary motive behind our cries for energy independence. Gasoline prices are soaring. The U.S. dependency on oil places our economy and, therefore, our national security at risk. OPEC (the Organization of Petroleum Exporting Countries) controls the price of oil by monitoring its production and supply. The organization also consists of countries that do not have our nation’s best interests at heart.

Recognizing oil is the primary factor the U.S. seeks energy independence, let’s continue down this path and reasonably consider when the U.S. can become energy independent.
Graph 2 – EIA http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/dem_image_us_cons_sector.htm

Depicted by the graph above provided by the EIA, the transportation sector consumes over two-thirds of our nation’s oil! Keeping this demonstration simple, it is easily evinced that oil, gasoline, and the transportation sector are intrinsically tied together.

Please bear with me as I provide you with some numbers. In 2006, according to the Department of Transportation, there were slightly over 250 million registered vehicles in the United States. According to the National Automobile Dealers Association, 16.1 million vehicles were sold in the U.S. in 2007. If every vehicle manufactured from this point forward operated on E85, electricity, natural gas, or even water, if would take 15.5 years just to simply replace our nation’s fleet of automobiles!

There are other factors impeding this as well. This scenario assumes every American will replace their automobile over the next fifteen years. Americans are keeping their automobiles longer than they have ever before due vehicle technology improvements and quality enhancements.

The largest barrier for alternative fuels is infrastructure. According to the Department of Energy, less than 1% of all gas stations have E85 available. That is, of over 170,000 gas stations across the U.S., only 1644 provide ethanol – 352 in Minnesota.

Many believe Brazil achieved energy independence through its ethanol production. On the other hand, the United States is the global leader in ethanol production. Brazil gained energy independence by expanding its offshore oil operations. Brazil could soon surpass Venezuela as South America’s leading oil producer.

Graph 3 – EIA “Brazil Energy Profile.” http://tonto.eia.doe.gov/country/country_time_series.cfm?fips=BR

The fact is that energy independence will require a concerted effort over a long period of time. This is not something that we will be able to attain in the next 10 years or even the next 20 years. The task ahead for energy is long-term in nature and the solution should coincide accordingly. In the meantime, the United States can alleviate the burden of increasing gas prices and the risk of OPEC supply fluctuations by expanding domestic offshore drilling operations.
Sources:
Energy Information Administration. “Electric Power Annual.” Table 3.2. Net Internal Demand, Capacity Resources, and Capacity Margins by North American Electric Reliability Council Region. Released October 22, 2007.

Energy Information Administration. “Electric Power Annual.” Table 2.4. Planned Nameplate Capacity Additions from New Generators, by Energy Source. Released October 22, 2007.

U.S. Department of Transportation. Bureau of Transportation Statistics. “Table 1-11: Number of U.S. Aircraft, Vehicles, Vessels, and Other Conveyances”. http://www.bts.gov/publications/national_transportation_statistics/html/table_01_11.html

National Automobile Dealers Association. “NADA DATA 2008”. Appears in May 2008 edition of Auto Exec Magazine. Pages 43-63.

U.S. Department of Energy. Energy Efficiency and Renewable Energy’s Alternative Fuels and Advanced Vehicles Data Center. Released 9/30/2008. http://www.afdc.energy.gov/afdc/fuels/stations_counts.html.

Renewable Fuels Association. “Industry Statistics.” http://www.ethanolrfa.org/industry/statistics/#E.

Finance Sector Summary