Friday, February 27, 2009
No, instead the stock market drops.
February 26th was almost a hallmark day for the Obama team. Stocks opened bullish with news that the new administration would inject another $250 Billion into the banks. Additionally, FED chairman Ben Bernanke promised that the administration would not look to nationalize banks. For the first time since taking office, the Dow was up 140 points and it seemed the market would reflect positive gains as a direct response to Obama’s policies and actions. Then Obama released his new budget, which promised to cut subsidies to private health care providers. Instantly, the stock market fell finally closing 88 points lower than the opening.
What does this mean? Well first of all, I had to rewrite this blog post. This post was originally going to commemorate Obama’s first victory with the stock market. More importantly, it shows that the investors in this country and the world do not have faith in our current President. You see the markets don’t reflect people’s feelings of the economy today, but their feelings of the future of the economy. They are betting against Obama. Please keep in mind that Obama needs to stimulate more than consumption if he wants to turn the economy around. More important than consumption, he needs to increase investment. We need to at least pause and take note of this. Who has more knowledge about finance and the economy? All the investors in the world or a lawyer turned politician for a few years before becoming President?
Below are several links about Obama’s stock market failures and almost success. In the meantime, I’m left to wonder when if at all Obama can bring confidence into the stock markets. Today the Dow fell another 119 points as the government became the largest stockholder in Citigroup. Bernanke, I thought we weren’t going to nationalize banks?
Wednesday, February 25, 2009
Stop! You’ve already fallen into my little trap. Do we have a corporation problem or a CEO problem? The CEO may look like the king of the company and his word is the law of the land. Really, corporations are owned by the stockholders. Who are they? They are you! Your 401Ks, 403Bs, IRAs, mutual funds, whole life insurance policies, 529 college savings plans all invest in companies making you part owner. The problem is that in having more owners, CEOs have been able to exploit the fact that more and more people are buying into corporations.
Back in the day, only the rich could invest. They were the only people who could afford to do so. Therefore, corporations had a few stockholders all of who had time and energy to make sure their money was being invested and spent wisely by the CEO. With the advent of mutual funds and the other investment instruments I mentioned above, CEOs have enjoyed a dilution of ownership. You see, a mutual fund doesn’t invest in a few stock, but many (hundreds possibly). When you purchase into a mutual fund (please note all the instruments I mentioned above work just like a mutual fund), your average investor is looking to the fund manager to get returns. Since the fund is invested in “a ton” of different stocks, odds are you are not looking at the individual companies the fund invests in. Furthermore, you are not exercising your right to vote on individual company issues. Who would have time? One of the reasons we invest in mutual funds is so we only need to look at the manager and not spend precious time reviewing the financial position of every company the fund invests in.
Today’s investment funds own a majority of stock in today’s market. That means there are a lot of voting rights that will never be exercised and therefore CEOs have a bigger pass on their actions. It’s like having a president who won the popular vote 10 people to 3 people. There was no majority of people in the nation that voted for the President. It’s just that only 13 people had the time to vote.
So what’s the solution? I don’t have one for you here! The simple common sense answer is that corporations and how they are allowed to run (ie. Voting) exists by law and therefore should in theory be able to be fixed by law. What is not the right is sticking it to the corporations. Especially through corporate taxes! Corporations do not pay taxes, only people do. There are no corporations in jail for not paying their taxes. The way taxes work in economics is that all entities try and move out of the way of taxes and whoever is least mobile foots the bill. Corporations have the easiest time moving out of the way because they do not really exist. So who gets hit? Part of the tax burden falls to consumers. However, it’s only a little since they are able to stop consuming. Employees are the ones that pay for most of the corporate taxes.
This is how the shell game goes for this tax: I have an imposed cost that I must pay to the government, my reaction could be to pass onto consumers, but they may stop buying. So, instead I will respond by cutting the cost that is easiest to control, labor. Therefore, wages are depressed or jobs eliminated.
So next time you hear about corporate profits, go ahead and cheer, because it means your investments are going to earn money. Cheer because it means more jobs. Let’s stop hurting ourselves with this “let’s stick it to the corporation” mentality. Let’s look at the real issue and the real culprits. It’s the only way things are going to get better.
Tuesday, February 24, 2009
After only 2 1/2 months of President-Elect Obama and 2 1/2 weeks of President Obama and already it’s apparent that the change that Obama brings is really the same old brand of politics. His rhetoric, full of inspiration and hope during the election, has almost degraded to whining. Here are 4 things that show you that only the names in the White House have changed.
1. Demanding swift action on his stimulus plan - A plan he talked about for two months during his transition and waited until he was in office to enact. Democrats have had control of congress for two years. There is no reason they could not have started the process back when Obama was elected. Obama had two months to work things out with republicans. Is it really wisdom to put the solution to end financial crisis on hold to ensure Obama was President by the time the bill made it to the White House? If things are so dire and we cannot wait, then he and congress must take the blame for waiting until January.
2. The bait and switch - Obama is claiming that his plan is new and a step away from the failed Republican policies. Yet, much of this round of spending is from the same playbook that Bush used with the June 2008 stimulus. Very original! Now we are talking about more money for banks too. I remember that Bush move from September. I really don’t see a difference between irresponsible Republican spending and irresponsible Democrat spending.
3. Reaching across the isle - I don’t even know how he’s claiming this one. He ate dinner with congressional Republicans, told them he was serious in implementing some of their ideas, but not one Republican idea made it’s way into the stimulus. That’s actually the opposite of bipartisan. If I eat dinner at someone’s wedding reception, that doesn’t mean that I can now say that I am related. Instead of being a leader and working out a compromise, he’d rather take political swipes and resort to condescending talk. Most of his anger is over the discussion taking place in talk radio, but projected to congressional Republicans. A little childish.
4. An end to fear and an era of hope - really? All I have to say is that Obama has not made things sound very hopeful. In fact, it’s all doom and gloom since he took office. I hope Obama learns to hope again. Now that he’s in a bind and wants his way, he’s out there to scare everyone. Where has that maneuver been used before.
I don’t know about you, but doesn’t all of this sound historically familiar?
Economics is a fickle social study. For every Nobel Prize-winning theoretical principle, there is a Nobel Prize for the exact opposite theoretical principle. That being said, one should really think of economists as weathermen and not financial physicians. Since many of you may not be fully aware of the major schools of economic thought, I feel it is my job to provide at least some anecdotal explanation for Classical and Keynesian Economics.
Trying to lay out an exact account of each school of thought would be like trying to explain all the denominations in the Christian Church. With that in mind, my explanations are allusions at best. Classical economics is based primarily on the philosophy that people will appropriate their money in the most efficient manner. People are rational beings, thereby knowing all that is going on in the market and always seek to maximize their wealth. Sound contrived? Keynesian thought is based on psychology, the creation of money, and the belief that in economic downturn we are in trouble in the long run no matter what we do- so we might as well gamble in the short term. Psychologically, businesses and individuals base their investment or purchases on a particular percentage of their income. If you budget, that is the level of consumption you will make. If you always spend all your money, once again your consumption is fixed. The consumption of money portion goes like this: the more money that is made available to people, the more consumption and investment will occur. Government spending has what is called a multiplier effect. This means that money is given to one party, who spends it with a second party, who spends it with a third party and so on, creating a snowball effect. Finally, the outlook (downturn) portion basically states this; we’re in economic crisis now and it needs to be fought to deter long term damage, therefore we can spend dramatically, and if we fail we were doomed anyways. Please note: in any government spending, the result in the long term is inflation at best. For this reason, time frame is important to government spending. The idea is to turn things around before inflation occurs.
Ok, the boring part is out of the way. The problem with Obama’s plan is that it is an extreme gamble, and (in my opinion) a poor implementation of Keynesian Economics. Now, there was a lot in this bill- some of it is more promising than the rest. I’m going to cover three of Obama’s most vaunted projects in the bill.
- $400 to $800 given back to the American people. The problem with this idea is the way in which Obama is implementing the plan. By giving everyone $13 per paycheck, the increase will not realistically change your consumption. In fact, if you are not spending all your money, you probably won’t spend any of it. I for one am going to increase my 401k contribution (which is evil, because it works against the stimulus. I am not a very good American)
- Giving money to the states for “shovel ready” infrastructure. The plans may be already on a list, but that does not mean that it will be spent immediately. The bureaucracy most likely to spend these funds will be local county governments. Therefore, the federal government must dole out and apportion the funds to the states that must dole out and apportion to the local governments who must dole out and apportion to the companies doing the work, over the course of the project. Part of this project requires bidding from the companies, which takes time. Payments will be made over the course of the project, which may be completed over years. As stated before, time orientation is important and many critics of government economic policy is that it takes too long to come to the rescue. Now Obama may have helped pass the bill in record time, but he’s picked one of the slowest implementation processes. Additionally, this idea has very high and wasteful implementation costs. Panels in Washington need to work on the right amount to go to the states, the states need to work out the right amount to the counties and supervise its spending and counties need to turn the initiatives into contracts and supervise the construction progress. Very slow and very wasteful.
- Influx of funds to green technology. This may be a good idea in and of itself, but it simply is poor stimulus. Green energy may indeed be the future of energy altogether. However, companies do not have the distribution, experience or economies of scale to quickly implement this money. Wind farms often require government approval and environmental impact studies. These farms often find resistance from nearby homeowners. Both solar and wind power require large manufacturing facilities (that cause a lot of carbon, I might add!) to manufacture vehicles for these energies. Although there is a growing labor force, it would take time for a competent green energy labor force to be trained to satisfy the needs of a boom. Even if a boom started tomorrow, these companies would need time to meet demand. A result, the funds will bottle neck.
Could the Obama stimulus work? Of course it is possible. Obama is right in that spending is stimulus. The trouble is that not all spending is equal. In fact, I will go out on the line and tell you what I believe he should have done.
- Suspend payroll taxes for individuals and companies. The only thing really needed to administrate is the stroke of a pen, so it is low in wasteful administration costs. It would give people a significant amount in their paycheck (Way more than $13) and since half payroll taxes are paid by the worker and half by the company it reduces the cost for companies to hire labor. It’s even better for small business sole proprietors who bear the full costs. The truth is that labor is the easiest cost for companies to control and therefore is the first thing that goes when the going is tough. I shouldn’t need to give examples to prove this point. Finally, this would include every paycheck for the year as opposed to a single one time influx.
- Many people are going to hate me for this one, but we should lower corporate income taxes. I know everyone thinks that corporate profits are the devil. If you believe this, you are misinformed. Perhaps my next note will be on why corporate profit is good for everyone. I digress; there is an opportunity that is being missed with this entire global economic crisis. In our narcissistic American minds, our economy rises and falls by our own consumption. However, in today’s global economy, this is only partially responsible for economic growth. One reality that most people do not think of is that economies are competing for investment dollars. For a long time, the US has been able to attract foreign investment despite high tax rates on return. This truth has been waning as China and India grow. We have an opportunity to capitalize on the poor world economy and offer high investment returns for foreign investment by lowering corporate tax rates. Offer a higher rate of return through less taxes and foreign investment will greatly increase.
So there it is in a nutshell. Obama’s spending qualifies as government stimulus, but is weak when it comes to true stimulus. I believe the “everything and the kitchen sink” approach that Obama took also leaves more of a chance that part of the stimulus will fail, increasing the chance that the stimulus will not be large enough, thereby causing any stimulus that is working to be insufficient. I may be wrong, but it looks like the investors agree with me. The stock market plunged the day the bill was signed.
The simple fact of the matter is that the American public has come to expect the Federal Government to solve all of life’s intricate problems. We expect government to end poverty, create employment, prevent us from eating unhealthy foods, provide us healthcare, ensure us a retirement, and lower the average temperature of an entire planet. Many of these issues are not new. Some have plagued civilized society since its inception. After 70 years since the New Deal legislation of FDR and 40 years after LBJ’s Great Society, what does our society have to show for all these issues we hold so dear? All the initiatives we’ve spent so much tax money to implement? Is it not clear that the federal government is only too inept, unprincipled, or unqualified to solve any one of thousands of social issues? If you do not believe me, simply look back at the abbreviated list of issues I wrote above and think of the nearly limitless government programs that exist already to combat them. Are we any better off?
The reason for the failure of the federal government and the multiplicity of issues is the fact that more and more we stop trying to solve these problems as a society. Instead, we would prefer to put the responsibility in the hands of an institution without conscience, mind or compassion. The truth of the matter is that there are few circumstances that can be solved by government and many that can be solved by community involvement.
Take the “no child left behind” law for an example. What is really going to help children to excel in their education; creating rigid tests and strict benchmarks for school administrations to pressure teachers to meet? Or perhaps a parent or respected community leader reaching out to children, encouraging education, and providing a role model. Odds are if you are an educated person, there is someone that inspired you in your education, but I guarantee that no one would say their inspiration was a law passed by congress or speech delivered by a politician.
Polarization in today’s politics really translates into frustration that the government is not focusing on the issues we feel need to be solved. If people are truly so passionate about the issues they believe, then I ask, what are you waiting for? You do not need a law to end abortion, go counsel young pregnant woman. You do not need a law to end pollution, go help clean up the roads, start a car pool, and be a role model for your community.
The truth of the matter is that we need to stop looking at the federal government as an entity that can save us from ourselves. We must realize that government is an entity and not a person. This being the case, government cannot inspire or show compassion. These are essential elements in fostering changing behavior.