Sunday, February 26, 2012

There Are Two Kinds Of Austerity. Which Will Greeks Choose?

Published in The Tennessean and Forbes,
Sunday, February 26, 2012

by Richard J. Grant

The radio announcer asked, “But will the Greek people tolerate another year of recession?” Left unasked was the question, “If they won't, so what? What are they going to do about it?” Some of their compatriots have responded with riots and arson to any suggestion of government austerity.

Such unproductive catharsis and destruction of property seems, however, to compound the austerity rather than mitigate it. Worse, it illustrates just how widespread is the confusion between government austerity and private austerity. Historically, those nations that have run relatively austere and less-interventionist governments have been those in which citizens have most prospered. It is in other countries where government has spent excessively and intervened heavily in the economy that citizens have felt true austerity.

In Greece, as in America, we see in their results the shortcomings of the conventional economic thinking that still reigns in Washington and other capitals. Many still believe that government spending, even beyond basic functions, is a source of economic growth rather than an inhibitor. Certainly those areas that are favored by government spending do tend to grow, at least for a while. But those sectors that are net taxpayers, or are burdened by regulations, are deprived of resources and opportunity and thereby prevented from attaining their full potential.

As government involvement in our lives grows beyond the minimum necessary to maintain the rule of law, especially when it ventures into schemes to redistribute wealth, consumption patterns are increasingly separated from production. As a growing proportion of the population learns that, through the power of the state, it can consume more than it produces, then the productive potential of that nation declines. Those who receive have less incentive to produce, and those who continue to produce must do so with less.

Nations that move in that direction find that they are less able to export manufactured goods and are more likely to export people. As long as there are other lands where people are freer and better able to build their own prosperity, we can predict the direction of migration.

The motive to migrate might not necessarily be a “yearning to be free” so much as a simple yearning to be more prosperous. It is not a prerequisite that the migrant understand the source of his new prosperity; he need bring only a willingness to work and to obey the law. But there is also a danger that the migrant could bring the same old voting habits that collectively created the incentive to emigrate.

The future of Greece depends on Greeks allowing their government to implement the structural reforms required as part of the €130 billion bailout package agreed by its European neighbors. Many will complain that the terms of the deal are too strict. They will not understand that such reforms would be in their best interest even without the bailout money. The path they have followed to this point is not sustainable.

Those who call for more government spending must understand that they are also calling for a commensurately higher level of taxation – either now or in the future. Greeks have tried to get something for nothing by pushing their tax burden onto future generations. Their government debt has ballooned to 145 percent of GDP. Those who stay will have to pay.

If they won't tolerate reform, then they will have to tolerate recession.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012




Sunday, February 19, 2012

We can't let individual mandate stand

Published in The Tennessean, Sunday, February 19, 2012 and Forbes

by Richard J. Grant

“Is a thumb a finger?” That is the question Major Muller asks in Michael Ondaatje's, The English Patient, to mock the Geneva Convention before severing his prisoner's thumbs. Were he a present-day Congressman, he might better ask, “Is an individual mandate a tax?”

This is the question that U.S. Rep. Scott Garrett, R-NJ, asked White House budget director Jeff Zients about President Obama's claim that no family earning under $250,000 would be subjected to a tax increase. Rep. Garrett asked, “So if I am part of a family that does not buy health insurance in violation of the president's health-care program and I have to pay [a fine] because of that, that is not a tax increase – that is not a tax on me?”

Sensing the trap, Mr. Zients tried to evade. He replied, “The Affordable Care Act saves money.” But not only was his statement absurd, it further highlighted the weakness of the Obama administration's case. The Affordable Care Act (ACA) raises costs. The individual mandate has no other purpose than to force low-risk, low-cost individuals to purchase medical insurance at a price that would subsidize insurance companies and current consumers for their increased costs.

Even with the individual mandate, costs will be higher and efficiency lower than it would have been in the absence of the ACA. Neither the individual mandate nor the other parts of the ACA will correct, or be justified by, the present-day high-cost environment created by previous government interventions. But without the individual mandate, the higher costs will be glaringly obvious.

Next month, the U.S. Supreme Court will consider the constitutionality of the ACA and its individual mandate, which coerces individuals to purchase a private product. If the act is struck down, due to the inclusion of the individual mandate, the Government will argue that the mandate is “severable” and that the remainder of the act should stand. But even if the remainder survives court scrutiny, the burdensome cost structure would more-rapidly be revealed.

This is why Rep. Garrett's question was so important. He closed in with, “A moment ago you said there's no tax increase.” Mr. Zients replied, “There aren't.” Rep. Garrett: “So that's not a tax?” Mr. Zients: “No.”

Rep. Garrett then put the issue in context, “That's not a tax. Okay. I just want to be clear on that because that's not the argument the administration is making before the Supreme Court.”

Politicians are often accused of saying different things to different audiences, and that is what the Obama administration has been caught doing. When speaking to voters, the administration claims that the individual mandate is not a tax. But if it says the same thing before the Supreme Court, the individual mandate will almost certainly be ruled unconstitutional.

Such mockery of the Constitution worked for the Franklin Roosevelt administration when it was marketing Social Security and defending it in court. But with closer scrutiny and better public awareness, neither the Supreme Court nor future congresses are likely to let the ACA stand.

The ACA shifts us further away from the rule of law toward a regulatory state. The longer it takes to remove this act, the more resources will be wasted by governments and private businesses in preparing to implement the act's provisions.

May checks and balances save us from an administration that is all thumbs.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Sunday, February 12, 2012

Is This The End Of "Patient Protection And Affordable Care"?

Published in The Tennessean, Sunday, February 12, 2012 and Forbes

by Richard J. Grant

Most progressives are not totalitarian at heart, they are totalitarian by accident. When they supported the Patient Protection and Affordable Care Act, they really believed that the title had something to do with the content of the act. They didn't really know what was in it; they had to pass it to find out.

The so-called Affordable Care Act is the product of a rightly felt belief that something is wrong with our health-care system. In that sense, the act is one of many such acts that was initiated to correct the problems created by previous government attempts to improve the economy and particularly the health-care system.

When the federal and state governments force insurance companies, through mandates, to offer expansive policies that bear less and less resemblance to real insurance, it should be no surprise that the policies become painfully expensive and less well-fitted to customers’ needs. When the mandates drive up the cost of the policies, many people decide that it's just not worth it to be “insured.”

This is where proponents of “social justice” show themselves to be divorced from moral reality. As Frederic Bastiat long ago recognized, they focus only on that narrow reality they are capable of seeing directly. They make no conceptual link to the unintended damage also caused by their actions.

What now appears as a crisis of the uninsured is not a consequence of capitalism, but a consequence of its absence. Insurance is a human response to the risks of life. The service is more creative and effective the freer we are to provide it. Creative solutions to such problems as “pre-existing conditions” have been held back or proscribed by a plethora of state and federal mandates and a tax structure that disadvantages personal, portable health insurance. It is to such government-created limitations that the government now responds.

Many proponents of “social justice” are now shocked that the federal government would use the regulatory power granted to it in the Affordable Care Act to force all employers, including those with church affiliations, to offer health insurance that covers contraceptives and related services, all without co-pay. Suddenly we see people standing up with admonitions to the effect of, “When they came for the Catholics we did nothing because we were not...”

But where were they before that, when they believed they would get religious exemptions? Did they stand up for those millions who would be denied the freedom to enter into an insurance contract of their own choosing, and who would be forced to insure for conditions that were not only uninsurable, but might also cause moral conflict?

It is a poor strategy for those who wish to defend the First Amendment of the Constitution to ignore most of what comes before it. It was such practical ignorance that allowed the federal government to interfere in the provision of medical care.

The regulatory and tax-induced distortions inflicted on our health-care system have spawned calls for more of the same, more central planning, to correct the problems. When people fail to act as commanded, they are coerced into the system. The “individual mandate,” which forces people to buy health insurance or pay a fine, is an integral part of the recent health-care reform act. It reflects the true nature of the movement that supports it, and it won't end there.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Sunday, February 05, 2012

When What’s “Good” For General Motors Is Not Good For America – or Built To Last

Published in The Tennessean, Sunday, February 5, 2012 and Forbes

by Richard J. Grant

An economy that is “built to last” will never be built by government. This might come as a surprise to President Barack Obama, but what is frightening is that it might come as surprise to a plurality of the American electorate. There is nothing like a sweet-sounding, and all but meaningless, phrase to persuade voters to stick it to themselves once again.

The great advantage of using government to subsidize or operate businesses is that we can ignore some or all of the costs. That is why so many people believe that their “green energy” projects are profitable and create numerous jobs. They ignore the burden of the subsidies and mandates that is shifted onto other people. It is also why many people believe that the nationalization of health care services saves resources in those countries so blessed by it. They ignore the burdens shifted to those who face doctor shortages, waiting lists, reduced innovation, and anticompetitive denials of a “certificate of need” for new hospitals.

Audiences are soothed by President Obama's words, “The American auto industry was on the verge of collapse. And some politicians were willing to let it just die. We said no.” And so it came to pass that the benevolent hand of government reached down and raised-up the industry again. The government just happened to find $85 billion supposedly lying around with nothing better to do.

But what was really saved? The American auto industry was not on the verge of collapse, and politicians don't let industries die, former customers do. The “industry” the president referred to was only General Motors, Chrysler, and the United Auto Workers. Ford declined to be messed up by further government intrusion into its affairs. Auto manufacturers with their operations mainly in right-to-work states were never in danger of bankruptcy.

Bankruptcy does not necessarily result in the disappearance of either a company or an industry. Customers will trade voluntarily with any company that offers them valued goods or services at an acceptable price. Whichever company does this best will be supported by customers. Companies that do this poorly will lose their customers, their employees, and their capital to other companies.

Although these transitions might bring periods of discomfort, this is how we make economic progress. But when government overrules our actions in the marketplace, it subverts that progress. When government tries to “protect jobs,” as if they are museum pieces, it ensures only that other more productive jobs will not come into existence.

Even if all the $85 billion of federal auto-bailout money is paid back, which is hardly likely, the net effect on our economy is already a loss. The federal government still owns a quarter of General Motors. Even if the share price rises sufficiently to produce a paper profit, we can never say that we are better off than we would have been had the government stayed out.

Government investment is coercive. It is not equivalent to private investment, which is voluntary and the investors necessarily bear the costs of their decisions. As governments invest in more projects, we are less likely to reach consensus on their worthiness. When local projects are funded by the federal government, with its widespread tax base, we are susceptible to the illusion that the money is free.

That's not a system built to last. It is built to waste.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012