Sunday, September 26, 2010

Majority of voters in 2008 made a hiring mistake

Published in The Tennessean, Sunday, September 26, 2010

Majority of voters in 2008 made a hiring mistake

by Richard J. Grant


The head of a very large corporation, who is described as a “die-hard Obama fan,” was recently quoted as saying that “the president could have used some executive experience on his all-academic economics team.” Noting that there is no former business executive in the Obama cabinet or among the top economic advisers, he opined, “I think it was a hiring mistake for the administration.”

Who else made a hiring mistake? Was this business leader not also a voter and, possibly, a campaign supporter and contributor? Are the skills needed to run a major corporation not transferable to one’s judgment at the ballot box? Was it terribly difficult to notice that one of the leading presidential candidates was a man in his 40s who had not yet outgrown his schoolboy Marxism?

This top business executive has subsequently discovered that his political actions have imperiled the welfare of not only his shareholders, but also of his customers, his employees and many others. But what is the solution?

Some believe that the president should replace his soon-to-retire, top economic adviser, Lawrence Summers, with a business leader. Would they be happy to bring back Henry Paulson, a former top investment banker who, like Summers, also has previous experience as Treasury Secretary? This is not likely to happen for reasons that include, but also go beyond, party affiliation.

Rumors suggest that the president will replace Summers with a “woman CEO.” This alone would rule out Paulson. Further, given the number of complaints we hear that too few women serve as top executives, it also rules out far more that 50 percent of possible choices. But it also brings our attention back to the priorities and judgment exhibited by the president.

Those of us who have worked in both academia and in business are well aware (or should be) that there are people in both these activities who are suitable to serve as presidential economic advisers. There are also top people in both activities that are clearly not suitable for public policy work.

Business people are just as susceptible as academics to the fantasy that they can cross over seamlessly into that third arena of government management and set everybody straight. Perhaps their experience with office politics and lobbying will prepare them for what is to come. But they are entering into an activity that has no clear bottom line, and the currency of collectivized, all-or-nothing decision making is very different from that offered by business customers.

Those who land in Washington with promises to cut away the “red tape” and get things done, soon discover that they no longer have the same sense of direction that they got from prices and customers in business. They also often discover, perhaps too late, that “red tape” is another name for “checks and balances,” which are essential to protect us all from the otherwise unlimited power potentially exercised by politicians and bureaucrats.

The essential element that is missing from the Obama administration is not business experience but good judgment.

Contrast the 20-month performance of President Barack Obama, with his Ivy League education, to that of a previous president who inherited a similar situation. President Ronald Reagan had majored in economics at Eureka College, a small Midwest liberal arts institution affiliated with the Disciples of Christ. He graduated in 1932, before Keynesian economics and a love of government money came to dominate academia.

President Reagan’s choice of economic advisers worked out for us much better than did President Obama’s. Reagan understood that people thrive on productive activity, and that production must always necessarily come before consumption. Recognition of this natural necessity leads to a moral imperative. It is the antithesis of “stimulus” theory.

Somewhere there is a board of directors of a very large company that might need to choose a new chief executive. Somewhere there is a large country where the voters must definitely do the same thing.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Sunday, September 19, 2010

Attempts at control merely show how little we know

Published in The Tennessean, Sunday, September 19, 2010

Attempts at control merely show how little we know

by Richard J. Grant


In their attempts to understand economic matters, people commonly make two big errors. One is to think of various types of relationships as if they were discrete and durable objects. An example is employment relationships. In this case, we not only speak of “saving” or “creating” jobs, we even think of them as being ends in themselves rather than remembering that any particular job exists to help create those things that we really want.

The other big error is to presume to have knowledge that we cannot possibly have. When there is a disruption in the supply of any good, such as gasoline, the price tends to rise. Such price rises can trigger outrage in people who see the increases as “price gouging.” The question for which these people have no defensible answer is, “What is the correct price?”

They do not know the answer now, just as they did not know it before the supply disruption. Rather than allow the price to rise in order to cover the costs of attracting gasoline supplies from other regions, they invoke “anti-gouging” laws and then wonder why the gas stations in their city have no gas. They have political power, but not the knowledge to avoid unintended consequences.

Attempts to protect preconceived notions of a “fair price” are similar to attempts to protect jobs. A “job” makes no sense when divorced from the purpose that gives it value. A job is just a relationship, an agreement to trade services in the pursuit of some goal or the production of some good. The relationship could last for an hour or for many years. It depends on what people believe they need.

The existence of a job depends on the private knowledge that is generated through many complex relationships. A “market” is not a thing; it is the name that we give to this network of changing, purpose-driven relationships.

We can attempt to count and categorize the jobs, but we cannot stand above the system with governmental powers and truthfully claim to be “saving or creating jobs.” Government officials can never have the detailed knowledge of either the individuals’ desires or the resources available to satisfy them. That is why the only thing that socialism can guarantee is failure.

Politicians always have an incentive to promise something for nothing. When gas prices rise, they try to hold them down. When home prices fall, they try to prop them up. The politicians get votes, but gas supplies don’t arrive and houses don’t sell. Then they blame “markets” and hurl accusations of “greed” at the usual suspects.

In the name of protecting jobs, and winning votes, politicians will often look outward for suspects. Treasury Secretary Timothy Geithner and a significant number of senators and congressmen have decided that China is responsible for some of our current unemployment. They seem to believe that they know what the “correct” exchange rate should be between the yuan and the dollar. They claim to know that the yuan is “undervalued” and that the Chinese government is causing this deliberately.

They disapprove of the recent Chinese policy of fixing the yuan exchange rate to the dollar. Interestingly, the fixing of exchange rates was perfectly acceptable during the quarter century following World War II. It is also acceptable for several other countries today, especially if they export oil. It was also acceptable during most of American history, when the dollar itself was defined as a specific weight of gold or silver.

Instead of being honored that China had chosen to define the yuan in terms of the dollar, Secretary Geithner called the yuan “undervalued.” But what does that say about the dollar?

If the Chinese are controlling other prices and enforcing regulations that are real trade barriers, then we have something to teach them. But if we fail to protect our own freedom at home, then that is our biggest error.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Sunday, September 12, 2010

Obama continues to gamble with the economy

Published in The Tennessean, Sunday, September 12, 2010

Obama continues to gamble with the economy

By Richard J. Grant


The Obama administration continues to throw “stimulus” mud on the wall with the hope that some of it will eventually stick. The next splat to hit the wall will be $50 billion of spending on infrastructure projects that were, apparently, not of a sufficiently high priority to be included in the previous flurries of stimulus spending.

Any attempt to explain this new spending proposal in terms of the “national interest” will result in bewilderment. It makes sense only from the perspective of the people who are pushing it and stand to gain from it. That would be the politicians and staffers whose futures depend on swaying voters’ minds before the November elections. It would also be those businesses and workers who expect to be the first recipients of the anticipated government spending.

In politics, it is often said that “perception is reality.” It is also said that in comedy, timing is everything. The politicians that best manage voter perceptions in the next eight weeks will be the ones laughing in November.

The new $50 billion won’t be spent before the elections. It might not even get through Congress by then. But it has been promised in the hope that enough voters will fall for it to make a difference on Election Day.

The Obama administration has also called for the creation of a national “infrastructure bank” to allow the federal government to give low-interest loans to local governments. The news reports fall into the trap of referring to these loans as “low-cost,” but that is to confuse the true cost with the nominal price. Federal taxpayers will pay for the road, rail, and airport upgrades way beyond the levels that actual passengers would have been willing to support by themselves.

The “infrastructure bank” is just the latest political vehicle with which to deliver the illusion of something for nothing. But its cost will be a lot more than nothing. It will turn out to be a Fannie and Freddy on wheels.

There is one new proposal by the administration that does make some sense. That is to allow businesses to write off 100 percent of new investments in plants and equipment in the current year, rather than expense it over three to 20 years. A shortcoming is that it will apply only through 2011. That doesn’t allow much time for thoughtful planning of new long-term projects.

Ironically, such tax write-offs are of higher value when tax rates are higher. It just happens that the Obama administration has chosen to let income and investment-related tax rates rise in January 2011. The political gamble is that voters will be silly enough to believe that the value of the temporary write-offs is greater than the long-term supply-side burden of the tax-rate increases.

The obvious question is, “Why not just cancel all the scheduled tax-rate increases?” An even better question would be, “Why not cut tax rates?” Either of these actions would help to make the current majority party less unpopular. There would also be no danger of reduced tax revenues, given that reducing tax rates would increase business returns and encourage business activity. Tax rates are already so high that we have observed an inverse relationship between marginal tax rates and tax revenues. In other words, lower marginal rates would actually increase total tax revenue collections.

If the Obama administration were more concerned about economic recovery and long-term prosperity than about redistribution and leveling, then it would simplify and cut tax rates – and more. It would reduce the size and scope of government spending as well as simplify and reduce the compliance burden of the whole regulatory structure.

Our current governing trend is toward dissipation and loss of international standing. If we don’t soon regain a moral and constitutional attitude, get our government spending under control and eliminate the budget deficit, then it will be more than mud that hits the wall.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Sunday, September 05, 2010

Effects of national debt felt in all aspects of life

Published in The Tennessean, Sunday, September 5, 2010

Effects of national debt felt in all aspects of life

by Richard J. Grant


On a recent speaking tour, Admiral Michael Mullen, Chairman of the Joint Chiefs of Staff, told audiences, “The most significant threat to our national security is our debt.” His point was that a sound economy would be essential to provide the resources needed to maintain a strong defense. This, he believes, is threatened by the increasing interest burden of our national debt.

Admiral Mullen is rightly concerned. New government debt is rarely incurred to finance important, long-term capital investments. Most often it covers only transfers and current consumption. As a percentage of the budget, defense spending has fallen from over 50 percent in 1960, to just over 20 percent in recent times. Now, more than half the budget is taken up by Social Security, Medicare, other health-related spending, and the various income security programs.

Interest payments have hovered around 9 percent of the budget and will likely grow. The White House recently raised its forecast for the fiscal-2011 budget deficit to $1.4 trillion, which means that the total national debt is expected to increase by more than 10 percent. The debt-service burden will grow accordingly; and when interest rates start rising, the refinancing of maturing government debt will amplify that burden.

Increased debt burdens imply increased future tax burdens. In other words, given the low investment value of most government spending, the increased future tax burdens will not be justified by increased future production. That means we’ll come out with lower disposable incomes than we might have otherwise.

There are other, more subtle, factors that Admiral Mullen might have mentioned. The incidence of the various taxes diverts resources to second-best uses. Those uses are judged, not by their total returns, but by their after-tax returns. Politically favored activities will have lower tax rates and will attract more resources as a result.

The complexity of the tax system and the possibility of sudden changes add to the uncertainties of life and make personal and business planning more difficult and expensive. This effect is compounded by the uneven expansion of government spending programs and the kaleidoscopic regulatory system.

Our reactions to all these things in the course of earning a living are reflected in the relative prices of all the goods and services that we trade. Whether we know it or not, those prices and the quantities are full of information about what we want and what resources are available. The less interference we have in our trades, the better we all communicate and coordinate our business plans with each other.

As governments grow in size and influence, they tend to replace private decisions with political decisions. Incentives are changed, actions are influenced, and information is lost. We lose our natural means of deciding and agreeing how best to use most of our time and resources. We turn smart money into stupid money.

Those who have experienced life in a communist country know that as government takes over we become economically blind. Private knowledge and initiative are replaced by glorified guesswork called government “planning.”

There is an old Cold War joke about a Soviet general boasting at an embassy party: “We will conquer every country in the world!” A thoughtful pause, then the refinement: “Every country except New Zealand.” A bewildered westerner asks the obvious: “Why not New Zealand?” The suddenly sober general replies: “Well somebody has to set prices!”

Socialist systems are aided by the existence of market economies outside their borders. The market economies generate price and product information that the socialist planners can copy in their forlorn attempts to postpone the collapse of their systems.

The Soviet system did collapse, and perhaps their old general did learn a thing or two about economics. Old habits of state control die hard, but the new Russia is now somewhat freer and stronger. The personal income-tax rate in Russia is a flat 13 percent. Now there’s something that even we can copy.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean