Sunday, April 29, 2018

Welcome to the 1930s

President Trump fired the opening salvo in a trade war—reminiscent of the 1930s trade war from the Smoot-Hawley Act, which prolonged the Great Depression—when he announced he will impose tariffs of 25% and 10% on imported steel and aluminum. Chinese officials quickly responded saying they would impose a 25% tariff on 106 U.S. products, including automobiles, pork, soybeans, fruit, nuts and other goods amounting to $50 billion on imports from the U.S. That roughly matched the scale of tariffs the U.S. government proposed on China the previous day. This is exactly how trade wars begin. Trump then hit back by threatening as much as $60 billion more in other tariffs and restrictions.

Trump tweeted, “Trade wars are good and easy to win.” Actually they are bad and impossible to win. When a trade—whether between individuals or countries—is freely made, it is a win-win situation, because both sides judge it to be in their interest. That is why countries with relatively free markets are more prosperous than those those without them. Government economic mandates are at best win-lose and often become lose-lose by victimizing not only one side to benefit the other but also by forcing a chain of secondary losses throughout the economy—as well as often victimizing the very people they are supposed to benefit.

For example, the tariffs on steel and aluminum are intended to benefit those industries and their workers but will also increase the cost of production for American firms that use those metals. So there will be lower production from U.S. manufacturing and less employment. The American steel industry employs 147,000 workers, while 6.3 million workers are directly employed in the steel-using industry. Thus about 16 times more workers are employed in steel-consuming industries than steel workers producing the metal. Economists Joseph Francois and Laura Baughman show that more workers (200,000) lost jobs because of George W. Bush's tariff on steel than were employed in the entire U.S. steel industry (187,500).

Rising prices of American steel and aluminum will not only mean higher costs for cars in the U.S. but leave the U.S. Big Three less able to compete with foreign auto companies. This will be counter to the effort to sell more American cars overseas to reduce the trade deficit. Goldman Sachs estimates that the tariffs would cost both GM and Ford $1 billion. Harley-Davidson may have to lay off 1,200 steel workers because the company relies on a special Russian steel not available from U.S. manufacturers.

Steel is used in natural gas pipelines, railroads and bridges. The steel tariff will make it more costly to maintain and replace the nation's infrastructure. There are 126 million households in the U.S. that buy appliances such as refrigerators, freezers, and stoves that utilize large quantities of steel and will now be higher priced. And aluminum is widely used in dozens of common products, including even beer cans and soda cans, accounting for about half the cost of a can.

China is the second-biggest customer for U.S. agricultural exports, after Canada. Trump's proposed tariffs, leading to retaliatory measures by China, will worsen the U.S. farm economy's slump that has already pushed some farmers out of business and eroded profits from seed, chemical and equipment companies.

The government's corn ethanol mandate provided generous tax credits and subsidies to stimulate demand for ethanol and other biofuels. This soon diverted 40% of America's corn crop away from the food supply. This government “gift” to the ethanol advocates was paid for by a government-imposed shortage that boosted the long-term mean levels for corn from about $2 per bushel to more than $8 per bushel in 2012. This price surge produced a range of harmful responses. Farmers planted 17 million new acres of corn and reduced the acreages of soybeans, wheat, hay and cotton, driving their prices to new highs, too.

Cattle farmers, unable to afford corn for feed, reduced their herds to levels not seen in 60 years. In the five years 2007 to 2012, beef prices rose 60%, and the International Monetary Fund food price index increased 42 percent.

The country endured an enormous amount of economic disruption by trying to foist an uneconomic fuel on the public in place of an economic one—gasoline. The government's decision was not based on economics but on politics. The economic solution is always the free-market solution. A political solution is always uneconomic because it confers on some a benefit at the expense of others whose compliance must be forced—by the police power of government because it is counter to the interests (and rights) of others. So then it is necessary for a bureaucracy to administer the tax credits and subsidies, none of which are needed in a free market.

The bureaucracy also finds it necessary to ameliorate the effects of uneconomic political policy on friendly foreign governments. For example, Trump claims the tariffs on imported steel and aluminum are intended to improve the balance of trade with China. But steel imports from China account for only 3% of U.S. steel usage, and Canada provides 43% of our aluminum imports—more than twice as much as China and Russia combined. The four largest sources of our foreign steel imports are Canada, Brazil, South Korea and Mexico. Canada and Mexico are our good neighbors, and South Korea is a key alley in Asia. So our bureaucracy must carve out exceptions or waivers to protect these friendly governments from the worst effects of our tariffs. Again, this is a bureaucratic function that is unnecessary in free markets.

If President Trump does not understand the economic effects of tariffs we have just explained—and believes “trade wars are good and easy to win”—then we have a president who is economically illiterate (as well as oblivious to the Constitution). And he has learned nothing from our history under the Smoot-Hawley Act.

Finally, environmental concerns are not a valid reason for political decisions to override economic facts (or constitutional principles). A political decision here based on the threat of so-called global warming cannot be a rational solution because the the environmental effects are worse for the uneconomic solution. For example, among many similar studies, a 2010 Congressional Budget Office study of corn-based ethanol found it terribly inefficient, with government spending astronomically more—$754 per metric ton—for avoided carbon emissions, compared with other policies. And a 2008 study in the journal Science found that biofuel production can produce hundreds of times more carbon emissions than the biofuels themselves.

Saturday, March 31, 2018

Obama Policy Linked to School Shootings

When Nikolas Cruz murdered 14 of his fellow students and 3 staff members at a Florida high school, there were a lot of questions and hand wringing over how this could have happened. How could he have passed a background check to purchase guns, especially since he had already committed a string of arrestable offenses on campus? It was widely assumed that the massacre had simply been a failure of law enforcement officials. But RealClearInvestigations cites a deliberate Obama policy of allowing thousands of troubled, often violent, students to commit crimes without legal consequence.

He [Cruz] had a clean record, so alarm bells didn’t go off when they looked him up in the system,” said veteran FBI agent Michael Biasello. “Once the agent, or any officer, entered his name in the NCIC system, his history would have been viewed. He probably wouldn’t have been able to buy the murder weapon if the school had referred him to law enforcement."

Broward school Superintendent Robert W. Runcie had close ties to Obama and his Education Department. He worked closely with Obama's Education Secretary Arne Duncan, and Runcie's applications for federal grants factored in tens of millions of dollars in federal funding for Duncan's department.

Asserting that minority students were treated unfairly, “Runcie’s goal was to slash arrests and ensure that students, no matter how delinquent, graduated without criminal records,” says RealClearInvestigations.

RCI continues, “Broward County Sheriff Scott Israel backed Runcie’s plan to diminish the authority of police in responding to campus crime. A November 2013 video shows him signing the district’s 16-page collaborative agreement on school discipline,” which lists more than a dozen misdemeanors that can no longer be reported to police, along with five steps police must “exhaust” before even considering placing a student under arrest.

“In just a few years, ethnically diverse Broward went from leading the state of Florida in student arrests to boasting one of its lowest school-related incarceration rates. Out-of-school suspensions and expulsions also plummeted.”

Broward County adopted a lenient disciplinary policy similar to those adopted by many other districts under pressure from the Obama administration to reduce racial ‘disparities’ in suspensions and expulsions,” said Peter Kirsanow, a black conservative on the U.S. Commission on Civil Rights in Washington. “In many of these districts, the drive to 'get our numbers right' has produced disastrous results, with startling increases in both the number and severity of disciplinary offenses, including assaults and beatings of teachers and students.”

For example, notes RCI, In St. Paul, Minn., a high school science teacher was “beaten and choked out” by a 16-year-old student, who allegedly came up behind him, called him a “f--king white cracker,” and put him in a stranglehold, before bashing his head into a concrete wall and pavement. The student, Fon’Tae O’Bannon, got 90 days of electronic home monitoring and anger management counseling for the December 2015 attack. No jail time. No criminal record.

The instructor, John Ekblad, who has experienced short-term memory loss and hearing problems, blames the Obama-era discipline policies for emboldening criminal behavior, adding that school violence 'is still rising out of control.'” That link has more examples.

Tuesday, February 27, 2018

Fed Gov't Won't Restrain Spending

In February President Trump proposed a $4.4 trillion budget for 2018 and projects a budget deficit for 2019 almost double his estimate last year. Mick Mulvaney, director of the Office of Management and Budget says, “Mr. Trump has now given up on balancing the budget over the next decade.” Instead, he proposes to increase the deficit by $7 trillion over ten years with no balanced budget in sight.

Mulvaney said wider deficits are an attempt to ramp up the economy. That's just what Obama's aim was with his $787 billion stimulus program and other spending. The Fed more than quintupled it balance sheet from less than $900 billion in 2008, when Obama took office, to $4.4 trillion now. The results were pathetic. Now Trump, who campaigned on reducing federal spending is embracing it, calling for massive infrastructure programs for highways, bridges, airports—just the kind of spending Hillary Clinton promised to do—which Trump criticized during the presidential campaign.

Obama favored the spending policies of John Maynard Keynes that Franklin Roosevelt used to try to pull the nation out of the Great Depression. It didn't work for either Roosevelt or Obama. On May 9, 1939, FDR's treasury secretary and good friend testified before the House Ways and Means Committee : “We have tried spending money. We are spending more than we have ever spent before and it does not work....After eight years of this Administration we have just as much unemployment as when we started....And an enormous debt to boot.”

The chart below shows that Obama's massive spending to create jobs and improve the economy was worse than doing nothing.

Adminstration's Projected Unemployment Rate 
With/without Obama's Stimulus Program

The chart shows (red line) the Obama administration's projection that the stimulus program would hold unemployment under 8 percent. Instead, unemployment actually rose higher than it would have been without the stimulus, and it remained above 8 percent for more than three years.

Keynes claimed spending—for anything—was the driver of the economy and that government spending produced a “multiplier” effect as the dollars were, in turn, spent again and again throughout the economy. He had no evidence to support this. Keynes' biographer Hunter Lewis says “There's just no evidence" that spending ever cured a recession, and Keynes "wasn't particularly interested in evidence." Similarly, Harvard professor Robert Barro has written: “What few know is that there is no meaningful theoretical or empirical support for the Keynesian position.” But the idea sounded superficially plausible enough to provide intellectual cover for what Franklin Roosevelt—and many politicians since—wanted to do anyway: massive spending for political and ideological purposes.

The Obama stimulus bill was based on a Keynesian multiplier of 1.5, meaning the gross domestic product (GDP) will increase by $1.50 for every additional dollar of government spending. This was voiced repeatedly by the Obama administration, but there is no evidence that multiplier is valid. If the multiplier really were larger than 1.0, the GDP would rise even more than the rise in government spending! The U.S., Greece and other spendthrift countries wouldn't be going broke—they'd be getting richer the more they spent! The reality is that the multiplier is always less than 1.0. The benefits of the money that is spent over and over in the private sector from the government programs are always less than the cost of the programs. Some businesses or sectors of the economy may benefit from government economic policies, but those benefits are always outweighed by larger losses elsewhere. Those losses are seldom figured in the calculations—or publicity—for the benefits but always make the overall multiplier less than 1.0.

Professor Robert J. Barro has done extensive research on Keynesian multipliers. A recent study by Barro and Charles J. Redlick found a multiplier effect of 0.4 to 0.7. The late Gerald W. Scully, a professor of economics at the University of Texas at Dallas, analyzed 60 years of federal outlays and GPD, 1947-2007, and found a multiplier of only 0.46.

The Keynesians implicitly assume that government can allocate resources more effectively and efficiently than the private sector. This is laughable. They argue that the multiplier effect allows money to recirculate through the economy multiple times. But if the same money were not preempted by government stimulus spending, it would be spent multiple times by the private sector, too—and more effectively. What makes the economy grow is not transferring more money to the government to spend but leaving it in private hands, where savings and investments are used to make workers more productive. The research by Barro and Redlick found that if government spending is funded by taxes, the multiplier is minus 1.1. In other words, if government raises taxes by $100, the economy will shrink by $110. Government doesn't create wealth; it consumes it.

The disparity of income between the rich and the poor often leads to the erroneous belief that the poor are poor because the rich are rich and therefore should be taxed more to redress the injustice. And even though they did not cause the plight of the poor, it is noble and righteous to redistribute some of their wealth because equality is a supreme virtue. It is an ideal that is superior to man's natural rights and the Constitution, which must be “reinterpreted” to include them, making them more relevant for today. (There is nothing in the Constitution that grants the government the power to dispense charity, redistribute wealth, or exercise any economic power at all.)

Public opinion polls show the populace wants government to do more, no consideration given as to whether it is constitutional. A January NBC/Wall Street Journal poll showed 58%--the highest share ever recorded—agreed “government should do more to solve problems and help meet the needs of people.” A Pew Research poll in January found majorities believe the government does too little to help young people, the elderly, the middle class and the poor and that government does too much to help the wealthy.

The wealthy, of course, become the prime target for high taxes because, as notorious bank robber Willie Sutton said, when asked why he robbed banks, “Because that's where the money is.” The top 1 percent of taxpayers pay more federal income tax than the bottom 90 percent combined. The top 10% pay 71% of all federal taxes. And 45% of Americans pay no federal income tax at all.

If there were no income disparity, and if there were perfect equality for everyone regarding all material values, there would be no reason for anyone to trade with anyone else. When two people agree to a trade, it is because they have disparity in the values to be traded; both place a higher value on what they receive than what they are giving up in return. The trade is a win-win situation for both. In a free market, all trades satisfy the participants' decisions that they are benefiting by an exchange or it wouldn't occur. When government intervenes with price fixing, subsidies, quotas, tax credits, regulations that benefit one side or the other, or requires purchase of something one doesn't want (e.g., Obamacare requiring everyone buy health insurance), some people benefit while others lose, because they wouldn't make the trade if not forced by the government. The more controls or costs the government imposes on commerce—including higher taxes—the more win-lose trades replace the win-win trades of a free market, and the more inefficient the whole economy becomes.

This is why tax cuts by presidents Ronald Reagan and John Kennedy resulted in increased tax revenue for the government. When Reagan became president, he reduced the top marginal income tax rate to 28%, from 70%, but when he left office, tax revenues had almost doubled. When Reagan took office in 1981, the top one percent of income earners paid 17.58% of all federal income taxes. Twenty-five years later, in 2005, that one percent paid 39.38% of all income taxes despite being taxed at a lower rate. In the 1960s President Kennedy cut the highest income tax rate to 70% from 91% with a similar result.

Presidents Harding and Coolidge cut federal income taxes several times throughout the 1920s, sharply lowering the top rate in steps to 25% from 73%. As the top tax rates were cut, tax revenues soared, as did the share paid by the rich. Those earning over $100,000 paid 29.9% of the total in 1920, 48.8% in 1925, and 62.2% in 1929. Between 1921 and 1928 the share of overall taxes paid by this group rose from about one-third in the early 1920s to two-thirds in 1928.

The larger tax revenues government receives from cutting tax rates are reversed when taxes are increased. Between 1968 and 1981, under the bipartisan tax increases of Presidents Johnson, Nixon, Ford and Carter, the income tax payments from the top one percent of earners shrank to 1.5% of GDP from 1.9%. And the average annual return from the stock market from the post-Kennedy peak in early early 1966 to the low August of 1982, before the Reagan surge took effect, was minus 6 percent per year for 16 years.

Much of the above is from my book The Impending Monetary Revolution, the Dollar and Gold, Second Edition, which contains additional information on the issues in this blog posting.

Monday, January 01, 2018

Fake Science Basis of Regulations

Americans are frightened by the drumbeat of claims they are in danger of cancer from chemicals in the environment and hence need more government regulation for protection. Paul Driessen is a scientist exposing the corruption of science, collusion of regulators with anti-chemical activist groups and activist lawyers, and diversion of U.S. taxpayer dollars to the International Agency for Research on Cancer (IARC) in France for phony manipulation of studies to show carcinogenicity.

The latest target of the IARC is glyphosate, the active ingredient in RoundUp, the most widely used herbicide in the world. It is also one of the most extensively tested chemicals ever. Over 3,300 studies over four decades attest to its safety. Driessen writes, “Virtually every reputable regulatory agency and scientific body in the world has determined that it does not cause cancer – including the European Food Safety Authority, European Chemicals Agency, German Institute for Risk Assessment and US Environmental Protection Agency. Only IARC says glyphosate causes cancer.”

Dr. Linda Birnbaum is director of the $690-million-a-year National Institute for Environmental Health Sciences (a National Institute of Health agency in the U.S. Health and Human Services). She has worked closely with anti-chemical pressure groups and even trial lawyers, thereby undermining the US regulatory and chemical review process and benefiting predatory lawyers who are suing glyphosate manufacturers. And in the coordinating and directing these activities, she has has turned the United States into IARC’s biggest donor. 

Driessen writes: “IARC repeatedly ignored or altered studies that exonerated glyphosate. One report clearly said the researchers “unanimously” agreed that glyphosate had not caused abnormal growths in mice they had studied. IARC deleted the sentence.

“In other cases IARC panelists inserted new statistical analyses that reversed a study’s original finding; quietly changed critical language exonerating the chemical; and claimed they were 'not able to evaluate' a study because it included insufficient experimental data, while excluding another study because 'the amount of data in the tables was overwhelming.'” These machinations helped to ensure a “consensus.”

“Equally questionable, NIH Cancer Research Institute scientist Aaron Blair conducted a years-long study that also found glyphosate was not carcinogenic. But he held off on publishing his results, and did not divulge his findings, knowing IARC would leave “unpublished” work out of its analysis.

"This is not science. It is manipulation and deception – supported by our tax dollars, and used to drive safe, widely used chemicals off the market.”

“Other activists repeatedly claim 'endocrine disrupting' chemicals which don’t cause cancer or other harm in high doses somehow do so at barely detectable levels. Another clever ploy claims no actual exposure is needed; kids get cancer because their parents or grandparents were exposed to something, perhaps years ago. It’s ridiculous”

Paul Driessen is senior policy analyst for the Committee For A Constructive Tomorrow and author of books and articles on energy and environmental policy.