Mark W. Hendrickson
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. This article is republished from V & V, a website of the Center for Vision & Values.
A Mid-year Economic Status Report
Economic growth in the United States is sluggish, and there are several reasons to be pessimistic about macroeconomic performance in the balance of 2008, if not beyond. The adjective "macroeconomic" is crucial. We should never forget that, even when major sectors of a country's economy are experiencing hard times and macroeconomic statistics are gloomy, there are always great opportunities for entrepreneurs and investors to be found in various microeconomic niches.
Another point to understand is that markets know far more than any mere economist. Inevitably, the next bull market in stocks will be born and economic activity will improve, even while economists, with our foggy crystal balls, continue issuing dismal prognostications. That being said, it seems to me that the piper now needs to be paid for decades of economic mistakes and that painful economic corrections and adjustments will continue for the foreseeable future.
Here are some of the economic chickens now coming home to roost:
1) The housing bubble bust may weigh on us for years. While housing prices rose from 1998 through 2005, between 1.25 percent and 3.25 percent of GDP consisted of spending financed by homeowners withdrawing equity from their houses. This debt-financed spending splurge was painless as long as prices of houses continued to soar. However, now that home prices are deflating, home equity credit has contracted. It was 3.125 percent of GDP in 2005, 2 percent in 2006 (the most recent year for which I have figures) but certainly far lower today. Housing prices, on average, have fallen 15 percent from their peak already, but in spite of lower prices, the inventory of unsold new homes has continued to rise, now standing at an 11-month inventory. The mortgage delinquency rate rose to 6.35 percent in the first quarter of this year, the foreclosure rate doubled in one year to almost 2.5 percent, and according to the Census Bureau, approximately 10 percent of houses built since 2000 remain unoccupied.
To give some historical perspective on the size of the housing bubble, residential property in the United States hovered around the same real value for the century spanning 1890 to 1990; however, housing prices doubled in real terms. If those prices return to anywhere near their historical average, then the 15-percent decline so far is just the beginning.
One enormous effect of the shaky housing market is that the mortgage-backed securities derivative crisis in the financial industry continues unabated. In fact, the financial crisis has gotten worse. Investment analyst Porter Stansberry asserts that Fannie Mae and Freddie Mac, the two giant federal mortgage agencies, already have negative equity (i.e., are technically bankrupt) and that their stocks will fall to zero.
2) Decades of Congress obstructing the development of domestic energy resources has produced $4 per-gallon gasoline. Among the casualties: Ford and General Motors may be mortally wounded, and prices of many products are rising to cover increased transportation costs. These higher costs are likely to eat into corporate profits and lead to low stock prices. Thus, Americans have been put in the uncomfortable position of watching the prices of their primary assets (homes and stocks) fall while the prices of the things they need to buy (food, fuel, miscellaneous consumer products) rise.
3) The cost of the Iraq war. This isn't a comment about the ethics or geopolitics of the war. The economic fact is that the huge spending on this war has weakened and will continue to weaken the dollar, just as previous wars had inflationary consequences.
The stock market, which tends to discount (anticipate) the future, is floundering now. Besides the economic conditions just described (none of which, alas, is amenable to a quick fix), the market may be foreshadowing political problems.
Monetary policy is paralyzed. The Fed has been checkmated. It can't raise interest rates to defend the dollar, because higher rates would aggravate the housing decline and related financial crisis. Nor can it lower rates to stimulate activity, thereby weakening the dollar and causing the dollar-denominated prices of oil and other essential commodities to rise.
The outlook for fiscal policy is also discouraging. The next Congress may be controlled by a veto-proof majority of radical anti-capitalist re-distributionists. Neither presidential candidate has a plan to rein in the rapid growth of federal spending, which has been cannibalizing the private sector. Both candidates pay homage to global-warming mythology and advocate imposing cap-and-trade ceilings on fossil-fuel consumption -- a folly that can only raise energy prices even higher. Neither candidate seems willing to let free markets make the painful adjustments needed to correct past mistakes.
In sum, the economic outlook for the coming months is dicey. Appropriate advice for most Americans would be Warren Buffett's two rules of investing: 1) don't lose the money; and 2) pay special attention to rule #1.
Big Oil vs. Big Congress: Another Witch Hunt
In what has become an annual ritual, the wizards of Congress are going after the leaders of Big Oil again. This is political theater at its most cynical. It's the modern version of the Salem Witch Hunt. The rapid rise of gasoline to $4 per gallon is a pain in the patootie, and somebody needs to be blamed, but why blame the American oil companies?
For some folks, Big Oil's guilt is inherent in the simple fact that these companies are big. Everyone knows that big is bad, right? (Except for Big Government, of course, because people in government are honest, pure, and noble, unlike people in the private sector.)
Just how big is America's Big Oil club? Well, the biggest of the big -- ExxonMobil -- is ranked only around 20th of the world's largest oil producers. Exxon owns a modest 1.08 percent of the world's proven petroleum reserves.
The oil producers which are larger than Exxon are all state-owned entities -- that is, the governments of Saudi Arabia, Kuwait, Venezuela, Mexico, etc. Not only are those producers foreign (meaning they lie outside of Congress' jurisdiction and therefore won't be called on the carpet to account for the pain Americans feel at the gas pump), they are notoriously corrupt and inefficient. (Gee, maybe not everyone who is in government is so pure after all.) These nationalized operations are plagued with mismanagement and inferior engineering. The results are subpar recovery rates and the premature decline of their oil fields -- a major reason why global supply is struggling to keep pace with demand.
If those vast foreign oil resources were managed by America's Big Oil -- the real professionals of the trade -- the global supply situation would be much improved. The problem, for all of us who long for lower fuel prices, isn't that American Big Oil is too big, but that its share of the global petroleum market is too small.
But aren't Big Oil's profits obscene? True, ExxonMobil is earning more dollars than any private-sector corporation in history. That is hardly surprising, considering how voracious the American thirst for oil and gasoline is, and ExxonMobil is our largest supplier. Nevertheless, Big Oil's rate of profit is unexceptional. The industry average for American oil companies last year was 8.3 percent -- while American cigarette and beverage companies' average profit margins were 19.1 percent, pharmaceutical companies' 18.4 percent, and American manufacturers' 8.9 percent. (Who said U.S. manufacturing can't compete?) American banks, insurance companies, telecom services, health care, and media companies routinely have higher profit margins than the oil industry, so why aren't the CEOs in those markets called on the carpet by Congress and threatened with special punitive taxes?
What is obscene is not Big Oil's profits, but Congress' verbal assault on those profits. The amount of money that Congress has taken from Big Oil through taxes over the past 20 years exceeds Big Oil's profits. Yep. Big Oil did all the work, Congress shamelessly helped itself to the lion's share of their profits, and now Congress threatens to take more. Big Oil spends virtually all its profits on developing additional supplies of oil. Does Congress really want to divert money from producing more oil? How will reducing the supply of oil help the price of gas to fall?
Come to think of it, maybe Congress really intends to reduce the amount of energy that Big Oil produces. After all, for decades it has been Congress' bipartisan policy to forbid development of the extensive petroleum reserves that we know are offshore and in Alaska. Just last December, the political powers-that-be imposed a moratorium on developing the oil resources in Wyoming, Utah, and Colorado. There is more oil there than in all of Saudi Arabia. The catch is that it is trapped in shale rock, which means it is going to be expensive to recover, but economically viable in a world of $100-plus-per-barrel oil prices.
When congressmen grill oil executives, you are witnessing a classic political sleight of hand. Congress wants to get your attention fixed on Big Oil so you don't stop to think how irresponsible Congress itself has been in blocking the development of domestic oil deposits.
This drama reminds me of Shakespeare's classic tragedy, Othello. The villain, Iago, poisons the mind of Othello against his innocent wife, Desdemona, by pouring lies into Othello's ear. Today, congressional Iagos -- themselves guilty of thwarting American energy independence -- are poisoning the minds of gullible Americans against the very oil companies that reliably supply us with essential fuels, and would be producing even more (resulting in lower prices) if Congress weren't blocking them from doing so. When it comes to energy, Congress is the problem and Big Oil is part of the solution. The longer it takes Americans to perceive this, the longer our energy woes will continue.
The Cynical Politics of Global Warming and Its Hobgoblins
"Cynical politics" may be a redundancy, but it is hard to imagine a more cynical political issue than global warming (GW). In his 1992 book Earth in the Balance, Al Gore called for a "wrenching transformation of society." Leftists, with their elitist penchant for social engineering, didn't need any convincing. The challenge for Gore was the inconvenient truth that, in a democracy, a would-be central planner needs to get the masses on his side, too. To do that, he borrowed a strategy encapsulated in H. L. Mencken's statement:
The whole aim of practical politics is to keep the populace alarmed by menacing it with an endless series of hobgoblins, all of them imaginary.
Apocalyptic GW became Al Gore's hobgoblin of choice.
Gore needed the scientific community to back up his assertions and the media to spread the word. Enlisting the help of the media was easy (apocalyptic fantasies are sure ratings winners), but getting enough scientists on board was trickier. When Gore started his GW campaign in the early 1990s, a contemporary Gallup poll of scientists showed that only 18 percent thought there was any evidence to support Gore's theory. Even a survey conducted by Greenpeace found only 13 percent of climatologists willing to declare GW "probable."
Nevertheless, Gore repeatedly claimed that (literally) 98 percent of scientists agreed with him, and he exhorted reporters to ignore skeptics. Right from the outset, the GW cult (like other illiberal movements, such as Communism and fascism) had to resort to the "big lie" technique to make it appear that the science of GW was settled.
As senator, and then vice president, Gore used his power to channel money toward those who "played ball" and away from those who doubted GW. The latter found that grant money dried up, promotions were denied, and even jobs were terminated. Gore's colleague, Colorado Senator Timothy Wirth, became Undersecretary of State for Global Affairs in charge of promoting GW theory and international agreements to address the alleged problem. Wirth was quoted as bragging that he could change a lot of minds with a billion dollars per year of State Department money. Indeed, recent estimates are that $50 billion has been spent promoting the GW theory (mostly governments and international organizations using tax money) and less that $1 billion to question it. Advantage: GW.
This is richly ironic. GW fanatics routinely accuse skeptics of having been bought off by Big Oil. They expect Americans to disbelieve private-sector scientists while trusting government-funded scientists (i.e., virtually all the scientists on the GW bandwagon) as if, a priori, government funding is holy, but private funding corrupt.
The Kyoto Protocol -- which called for the developed nations to curb their CO2 emissions -- was the international front of Gore's GW agenda. For the last seven years, Gore's media allies have denounced George Bush for "killing" Kyoto. Poppycock! The history is this: after the Clinton administration signed Kyoto, the senate voted 95-0 against implementing Kyoto's provisions because they were slanted so unfairly against the United States. Clinton then signed an executive order barring the executive branch from enforcing any part of Kyoto. Bush didn't kill Kyoto; he inherited a corpse. (Factoid: since Kyoto was written, greenhouse emissions in the countries that adopted it increased 21.1 percent on average, while U.S. emissions increased only 6.6 percent; yet, the United States has been singled out as the irresponsible global citizen. That's politics!)
Kyoto's agenda wasn't to save the world, but to shackle economic activity in this country through curbing energy consumption. It's easy to understand why foreign economic competitors would want this, but why would Gore and American liberals want to do this to the American people? The answer is simple: the lust for power and importance. Remember: control energy and you control people.
There are signs that Gore's movement is losing credibility. An English judge ruled that Gore's award-winning film An Inconvenient Truth may not be shown in U.K. schools without disclaimers and the inclusion of opposing opinions, on the grounds that it is a work of political propaganda, and not scientifically sound. Various scientists on the political left who formerly endorsed the GW dogma now repudiate it. Remarkably, 19,000 scientists have signed a statement urging our government not to take any rash, costly actions to curb CO2 emissions.
Unfortunately, taking rash, costly action may be the eventual outcome. Last week, the Senate considered setting limits on CO2 emissions through the colossally expensive and grandiloquently named "Lieberman-Warner Climate Security Act." Fortunately, this destructive proposal doesn't have enough support to pass now, but it raises the possibility that Al Gore will get the last laugh after all. What an irony it would be if, even as scientific support for his GW theory crumbles, his years of propagating the "big lie" of the GW hobgoblin were to cause Congress to impose the "wrenching transformation of society" that he has long yearned for.
Signs of Poor Governance: Is America Becoming One of the Worst?
A recent International Monetary Fund research report listed the countries expected to suffer the worst currency depreciation -- that is, the worst inflation -- this year. Zimbabwe (a mind-boggling 300,000 percent-plus), Venezuela (25.7 percent), Bolivia (15.1 percent), Nicaragua (13.8 percent), and Argentina (9.2 percent) are the top five. What do these countries have in common? You could reply in two ways: 1) they are poorly governed; 2) they are leftist governments, which is simply another way of saying that they are poorly governed.
Indeed, it is difficult to think of any economic indicator that exceeds inflation as evidence that a country is poorly governed. Leftist governments -- defined here as regimes unfriendly to private property, private enterprise, and private profits; regimes that constantly seek ways to redistribute wealth from the economically productive members of society to favored political constituencies; and regimes that reject free markets and instead expand government control over economic activity -- invariably cripple production while increasing government spending. The inevitable result is inflation.
This is no mere academic discussion. It was less than 30 years ago that inflation in the United States was in the 13-14 percent range. Today, resurgent inflation in the United States is officially listed as 4 percent, but for many Americans, it feels much worse. Is it possible that we might break into the IMF's list of the top-five inflation-plagued countries in the next year or two? To answer that, we should ask ourselves if we have sound governance or poor governance. Sadly, examples of the latter seem to be proliferating. The following are some examples:
In just eight years, U.S. federal spending has ballooned from $2 trillion to $3 trillion -- a 50 percent increase at a time when the average private income increased only 28 percent.
At 35 percent, the United States now has the second-highest corporate profits tax in the world -- absolute insanity in a time of intense global competition when Congress should be doing everything in its power to help domestic employers compete against foreign companies.
At a time when formerly Communist countries in central and eastern Europe have adopted flat-rate personal income taxes less than 20 percent, and are booming as a result, the United States clings to an outdated Marxian, growth-retarding, class-warfare, graduated income tax, and at least one presidential candidate wants to raise those rates even more.
Last fall, Congress decided that financial institutions were making too large a profit on student loans, so they mandated lower returns on such loans. As a result, many private lenders have dropped out of the student loan market entirely, and Congress is now trying to bail out such lenders by empowering the Department of Education to purchase student loans directly from private lenders. Where will the Department of Education come up with the necessary funds? From higher tax revenues, of course.
Congress recently passed a $307-billion farm-subsidy bill. President Bush tried to get Congress to limit subsidies to those making no more than $200,000 per year, but Congress rejected that proposal, paving the way for subsidies to those with annual incomes over $2 million. Some senators solemnly intoned that they were doing this to prevent bankruptcies. Apart from the fact that the centuries-old trend is toward fewer agricultural producers (i.e., farm bankruptcies) as a result of improved efficiencies and economies of scale, and in spite of the fact that many farm prices are at multi-year highs, we should ask why Congress, instead of the marketplace, should decide which businesses survive and which do not? Central planning, anyone?
Congress' recent denunciation of private oil producers include comments that perhaps Congress should "socialize" these companies, or at least increase taxes on them. Apparently, some members of Congress subscribe to the school of thought popularized by that eminent political philosopher, Jane Fonda, who has long felt that the cure for Big Oil's alleged oligopoly is to create a federal monopoly. Does anybody seriously believe that monopolies are good for consumers? And another question: if Congress confiscates more profits from Big Oil, who will make up the resulting reduction in spending on discovering and developing oil reserves?
Congress is currently working on a multi-trillion-dollar plan to impose a cap-and-trade system on carbon dioxide emissions. The Wall Street Journal and others have already explained what a colossal boondoggle this would be, but the fundamental question is this: Why, at a time of record energy costs that are imposing great hardship on many Americans, does our government want to make the use of hydrocarbon energy sources even more costly?
If you keep your eyes and ears open, I'm sure you will discover other ways in which our government is seeking to expand its own reach while making Americans poorer. We are on a leftward course already, and we may accelerate our march in that direction after the November elections. If we do, don't be surprised to see inflation get worse and the United States appear near the top of the list of the world's most inflation-prone, poorly governed countries.
More or Less?
Thank you, Rahm Emanuel! Mr. Emanuel, a Democratic congressman from Illinois and former senior policy adviser to President Clinton, published several election-year policy proposals on the opinion page of The Wall Street Journal.
The timing of Emanuel's article was magnificent. The Democratic nomination campaign had degenerated into neurotic angst over whether the eventual nominee would have different biological plumbing or more skin pigmentation than any previous nominee for the U.S. presidency. Most of us could care less if the president is a purple neuter as long the policies advocated are acceptable, so Emanuel performed a public service by focusing on substantive rather than symbolic issues.
Although Emanuel's proposals were standard Democratic talking points -- winking to the labor unions, proposing increased government spending on education, health care, and alternative energy sources -- his proposals were clear and straightforward. His essential political philosophy -- shared by Clinton and Obama -- can be summarized in one word: "more," as in, "more government." Indeed, from an economic standpoint, the elemental political choice is always between more or less government. Do we want more government control over our lives and livelihood or less? More government spending and programs or less? More government power over us or less?
One of the salient features of Election Year 2008 is how strongly and consistently the Democrats present the case for more and how the Republican Party has failed to provide voters an alternative by making the case for less. The one exception, of course, has been Ron Paul, whose libertarian ideas won intensely enthusiastic but numerically limited support.
The Democrats are politically smarter than the Republicans. Experience has taught them the political foolhardiness of over-reaching. Many Democrats still have socialistic biases, favoring government control over market forces and government redistribution of wealth, but they have toned down their rhetoric and taken their overt socialism underground. They have become the modern American version of Britain's old Fabian socialists, content to expand government control in gradual increments rather than in a rapid, convulsive revolution. Democrats today are far too clever to say that if they could have their way, government would take care of everything for us, but you know where their heart is by the fact that on any economic issue, they will invariably come down on the side of "more."
If Republicans or libertarians ever want to amass popular support for "less," they will need to emulate the Democrat's gradualist strategy. That means presenting an agenda less radical than Ron Paul's. Such a suggestion is anathema to libertarians, but the political reality is that only a small percentage of Americans are true believers in the polar ideologies of socialism on the left or libertarianism on the right. The adherents of those philosophies will have to settle for modest successes -- either more government or less, not total government or zero.
The libertarians continue to marginalize themselves and render themselves ineffective by continuing to let the perfect be the enemy of the good. If they ever hope to win national elections in the United States, they will have to advocate incremental steps toward less government, instead of an overnight demolition of it. They might start by proposing to first freeze federal spending, and then, when people see that it did not precipitate the end of the world, propose cutting spending by two percent per year. They might call for privatizing a few tasks currently performed by government that could be handled by private firms as a first step to a broader privatization. Instead of placing expiration dates on tax cuts, as the Democrats forced President Bush to do, those who believe we need less government should propose that various government spending programs expire at year-end unless re-examined and reauthorized.
Of course, the main reason why the philosophy of less isn't championed by John McCain and most Republicans today is because they simply don't believe in it. The dominant wing of the Republican Party in the last 50 years has been comprised of those who want more government, though usually not as much as the Democrats want -- "Big Government Lite." *
"Don't expect to build up the weak by pulling down the strong." --Calvin Coolidge