Tuesday, June 28, 2016

What Else? Brexit

Everyone is talking about Brexit. It reminds me of the conversation I overheard after the NBA Championship. One person remarked about how he was very sure that the Cavaliers would win despite being down in the beginning of the series. His curious friend asked why. He said it was the uniforms. He really loved the uniforms.

When an event gets elevated to infinite coverage in the media we all think we need to have strong opinions despite not knowing a thing about it. That’s how I feel about Brexit. EVERYONE is part of the national obsession to have an opinion about it. I cannot believe how much has been written or spoken about it since the results of the referendum were known. What are we to think?

As in the NBA example above, a beginning step would be to know answers to some basic questions. What is the NBA? What are the rules of basketball? Why do players constantly touch each other and then get irritated when the little men in the striped uniforms blow whistles?

There are a lot of similar questions we might ask pertaining to Brexit before we start having opinions about its impacts on us. What is the EU and why would any self-respecting country ever join it when national sovereignty is at stake? What is the UK? Is it in Kentucky?

Today’s post has two objectives. First and foremost I want to provide some background and write about the EU and the UK. The upshot is that while national sovereignty is at issue, the loss portrayed by the LEAVE group was highly exaggerated. The LEAVE group has as much to fear from its own government's ideological tendencies than it had from some centralizing devil called Europe.Second I want to make the point that compared to other crises suffered in the near-past, this one is almost totally psychological.

Let’s start with the second objective. Nothing has happened except to announce that a referendum declared that Brits want out of something called the European Union. While the UK government will probably go along with the popular will, it will take a while. So let’s be clear. For a while nothing has happened. Stocks of dotcom companies did not find reality. The load of bad subprime mortgages did not become impossible to bear. No government raised taxes or reduced pension spending.
Nothing bad happened in the way of the usual macro suspects. What happened is that a country decided to not be in the European Union. So the first point is that nothing happened to directly cause crashing stock and foreign exchange markets not to mention the price of a gallon of gasoline.  Okay -- the British government has become less functional. Is that a plus or a minus? Really! 

Aha you say – but markets did crash and babies cried. And that’s my point. It is mostly psychological. It is all expectations! What happened is that a bunch of soccer rowdies decided to quit the EU club sometime in the near future. And that set off a lot of concern. I am not making fun of the concerns. They have some basis. But keep in mind that Brexit will be gradual and it will be in the best interest of most parties involved to make it work smoothly and to try to minimize the many impacts that will arise as the divorce takes place. Recall that President Obama advising Brits to stay in the EU said some threatening things. But now that the decision has been made he is already promising to find ways to make the transition work.

I am not forecasting the future but what I am saying is that the alarm bells may be a little too shrill for the reality. Brexit is not the end of the world and Brexit will unfold with many impacts in many places and we will deal with them. Let the markets take a big breath.

Now for the background. A basketball is a round thing that you bounce on the floor and then shoot through a little hoop. 

Now for the United Kingdom. Straight from Wikipedia (https://en.wikipedia.org/wiki/United_Kingdom )
The United Kingdom is a constitutional monarchy with a parliamentary system of governance.[12] …The UK consists of four countries: England, Scotland, Wales, and Northern Ireland.[15] The latter three have devolved administrations,[16] each with varying powers,[17][18] based in their capitals, Edinburgh, Cardiff, and Belfast, respectively. The nearby Isle of Man, Bailiwick of Guernsey and Bailiwick of Jersey are not part of the United Kingdom, being Crown dependencies with the British Government responsible for defence and international representation.[19]

Most relevant is that the UK (often called Britain or Great Britain) is a sovereign state in Europe and is mostly composed of England, Wales, Scotland, and Northern Ireland but not Ireland or Puerto Rico or Texas. The UK joined something called the European Economic Community (EEC) in January of 1973 and then in June 1975 another vote solidified its membership in Europe. As of last week Britain will be the first country to reverse a decision to join the EU. Apparently the English wanted Brexit but not so clearly in the other countries in the UK. So that brings up a possible change in the make-up of the UK itself.

Moving along, what is the EU? The EU was a club of 28 sovereign nations. In the future it will have 27 members. The beginnings of European integration came after WWII when Belgium, the Netherlands, and Luxembourg joined France, and Germany, and Italy in something called the European Coal and Steel Community. The basic idea was that maybe if they cooperated on economics they would quit starting world wars. It worked pretty well and a very quick history is that they moved on from coal and steel to the idea of a single largely unimpeded market across Europe.

Until last week more and more countries embraced the idea of a free market in Europe. And they joined the EU. Sure Germany was the economic heavy weight. But like most free trade areas, the rest joined because of the expected benefits arising from fewer trade barriers and the removal of tariffs. Not all was tea and crumpets – with the single market came incursions into national sovereignty. Then came the euro currency that was adopted by 19 of the 28 countries (and not by Britain). Some thought a single currency made sense in a single marketplace. Others see it as too much togetherness. Now some want a single fiscal policy. So far no cigar on that one.

So you see the story, right? A free single market makes a lot of sense. That is the glue of the EU. Giving up too much power to Europe is not always popular in any given country or countries. But keep this one fact in mind. The institutional design of the EU is to protect national sovereignty. As in any club you join you win some decisions and you lose others. So long as the benefits of club membership are great enough then you stay in the club.

Quit snoring. I am almost finished. Like the US, the EU has executive, legislative, and judicial branches. All the institutions are run by representatives of the sovereign states. For example, the Council of Ministers is literally a group that consists of the government ministers of each EU country. The EU Parliament members are voted for in each country by the citizens of that country. The point is that EU legislation and rules are legislated and approved in each country before they can become EU law. 
Most rules must have unanimous support from all 28 states. In the very relevant situation of immigration, a country has the right to opt out of any or all EU agreements. This link lists all the area of EU governance that require all 28 states to have unanimous support 

Whew. Where is my bottle of scotch? Er I mean JD. 

Tuesday, June 21, 2016


Larry, would you please take out the trash? Sure honey, I will as soon as I’m finished writing this blog.
I noticed the trash is still there and the truck will be here in the morning. No probs babe, I will get to it as soon as I finish my nachos.
It is almost bed time and guess what – trash still here. I know, it ain’t no big thing. As soon as Two Broke Girls is over I will jump on it.
It is now 6 am and the truck will be here any minute. Groovy, as soon as I stop watching Two Broke Girls reruns, I will jump on it.
Honey, the truck just left. Well, there wasn’t that much trash anyway, I promise to get on it next week.

Sound familiar? I am referring to the Fed. When will Ms Yellen and her gang of procrastinators realize that you cannot postpone the inevitable forever? Yup, they did it again. This time the excuse is Brexit. Or was it a one-month earth-shaking slowdown in employment? Or was it George Bush?

Come on Fed-dudes. Can you for a minute distance yourself from your super-hero selves and get real? Think about what you are doing to exacerbate serious and harmful imbalances in this country.

Imbalances? Um ask anyone who wants to save for the future how they are doing? They either get a negative interest rate or they have to take ridiculous risk just to be a prudent saver. Seriously, do you not see the harm in this? And then there is the promotion of all sorts of borrowing  at historically miniscule costs. Didn’t we just have a financial crisis? And you want to promote more risky borrowing? Wow. With a Fed like this who needs corrupt bankers?

Inflation? I know the Fed has been quite generous with money and yet no inflation. But do we really expect that to last forever? Are there not signs that wage growth is picking up? Will inflation never return as the Fed continues to float the US economy?

And for what? Hi honey I just decided to do the healthy thing and lose some unwanted blubber. I plan to lose a quarter of a pound a month this year. Nice going dear. Why would the markets go wild after such an announcement? The Fed is not jacking rates to 22.0%. They are talking about 0.25%. All together now… 0.25%... 0.25%...0.25%. Try it to the tune of Gloria. Chords – E, D, A.

And then there is the question of when. If not now, when? I know you might have forgotten that there is an election coming but if they are not going to raise the rate today, then surely raising it in September is much too close to the election. And don’t forget the opening of football season. No way Nolan. You cannot raise rates right before IU plays the FIU Golden Panthers on September 1. And then there is Groundhog Day. 

This last idiotic non-move by the Fed proves that our leadership needs to be replaced. Some of my reactionary friends want to replace the Fed with a gold standard. But gold standards notoriously fail when governments fail. So long as we have a government that has abdicated its financial role we are stuck with a miserable but finely coordinated policy of financial neglect. Way to go government. Give me a G! Give me an O. Nevermind. 

This gets me back to my wail of last week. We don’t need gold. We need some common sense. We need a government that has watched one bankruptcy after the next. Aren’t you glad you don’t hold Puerto Rican bonds? Why does not our government learn? Both the government and the Fed are putting us in a situation of financial jeopardy. Maybe they want another crisis? Then they can once again don their super hero costumes, point the finger of blame at banks and greedy capitalists, and continue on their confident but destructive ways.

Moderates, it is time to reclaim our country. (If you don’t know what that means, see my post from last week or send money.)

Tuesday, June 14, 2016

Better Than a Stick in the Eye

“Better than a stick in the eye” means an outcome is not very good but it is better than getting something much worse. No one wants to get a stick in the eye. Logic dictates that we try to do better than the stick but right now it appears that we’d rather have the stick. 

No I have not emptied another bottle of JD. I am thinking about economic policy and the coming presidential election. Now that Hillary Clinton seems even more likely to be the Democratic candidate the barbs are flying between her and Donald Trump. He is dangerous and incoherent; she is immoral and corrupt. Your mother wears combat boots. Your father is dumber than Papa Q. Bear (of the Berenstain Bears).  

I am hoping that somewhere down the line these two candidates will actually talk about policy but I am also hoping that the JD genie delivers a case to my front door. The question is not why these two people prefer to shout at each other. The question is why we voters put up with it.

Why are we so entertained or enamored by rude, colorful language in the people who say they want to be President of the USA? Will they continue this when in office? Will Hillary decry that her pecs are bigger than Putin’s? Will the Donald say his hands are larger than Dolly Parton’s?

The last time I looked US economic growth was lackluster, capital spending is literally falling, and the Fed decided to put off returning to a normal policy regime because the economy appears too fragile to withstand a 0.15 increase in the federal funds rate. You would think that these candidates would be seriously debating what to do about falling labor productivity, workers leaving the labor force, soaring national debt, and Jason’s new addiction to smoking meats.

Doing all that hard work would be better than a stick in the eye yet we prefer the stick. Why? I guess because we have gotten to the point where answering the real questions is either boring or just too hard. What to do about productivity? Wow, talk about a sleeper. Go down Main Street of your town and ask 50 people what they would do about declining US productivity. Then ask those same people to name 7 types of weed or all the members of the SF Warriors including the names of the managers. I think you see what I mean.

But I think there are enough of us who really care enough to want some real debate. I am going to get in trouble with just about everyone I know for saying the following but I think it is true.

·      Monetary policy might be much too expansionary right now but that policy will always be used by politicians to stimulate a weak economy. Can't we find something in between?
·       Fiscal policy is leading to unsustainable national debts but again, deficit spending is ingrained in national thinking for a weak economy. Is there no middle ground? 
·       Legal abortion is here to stay. We might argue about making it a little easier or harder to get. But it is not going away.
·       China might not abide by all agreed trade rules but it cannot be ignored.
·       Immigrants – legal are not – who have been in this country for decades might deserve a sympathetic ear even as we realize that a country has to protect its borders.
I could go on and on but you get the drift. We have serious policy issues and they are not going to be resolved by sticking things in our adversary’s eyes.   We have had enough of that already. For two years the Democrats held a majority and used it. Ever since Republicans have tried to counter everything Democrats did. There is much shouting and accusing and little in the way of governing. If we keep that up for another 8 years, what is going  to happen with all our issues?

Some Democrats say that when they are restored to power they are going to ram all their stuff down our throats. Some Republicans say the same. Finally back in power we Republicans are going to undo everything Obama did.

Really? Is that what governing is supposed to be all about? I don’t think so. I think there are enough of us who think that way so we need to be heard. We can begin by stuffing a bunch of $100 bills in a pillow case and mailing them to me. Okay nevermind that one. But for a start we should stop supporting candidates who won’t debate real issues. We should stop supporting candidates who continue to call each other names. Having real debates about issues is not a lot of fun but it is definitely better than a stick in the eye. 

Perhaps we should threaten a voter's strike. If our current crop of candidates knows that they are going to lose votes from moderates, perhaps they will moderate. Let them fight for moderates by explaining what they are going to do to solve our current economic mess. If they won't and they continue to feed the polar frenzy, then we should make it very clear that we won't vote for the jerks.  Don't they have something to gain by retaining and attracting moderates?  What happens if the moderates organize a revolt?  

Do you have a better idea? Naw. You Ds fear Trump so much that you'll stick with candidates who appear more reasonable yet haven't said one sensible thing about solving our economic problems. You Rs will let Trump say anything because you think Hillary will name the wrong people to the Supreme Court or will be pushed to support liberal causes. And while you do all that people drop out of the labor force, banks and firms sit on their resources, and productivity gets lower than a limbo stick in Nassau. If we don't demand sensible policies then the polar extremes will continue to destroy this country. Whew, I need a large ice cube and a cold glass. 

Tuesday, June 7, 2016

Padded Bras, Idiotologies, and Government Regulation

After my last diatribe about supply-side economics a business friend of mine gently reminded me that I left out the impact of government regulation. So immediately I decided to write something about the impact of government regulation and warn my 17 readers about the evils of government. I was stoked.

But then it dawned on me that this is 2016 and the year of a presidential election. It also dawned on me that the candidates have waged a war or revolution against most things large – large companies and large government. And revolutionaries don’t care much about careful analysis – or for that matter, any analysis. They prefer to have rallies and shout slogans and be especially proud of themselves for defying the man.

So I immediately felt a sense of reluctance. Who really cares about the impact of government? We have our ideological camps and the camps already have well-rehearsed slogans. One camp says to regulate those greedy, immoral corporations. The other camp screams that governments are morally bankrupt and bought and paid for by those corporations. Between revolutionary zeal and warring idiotologies (not a misspelling) why should I spend time writing “on the one hand this and on the other hand that”?

Why? Because it feels good. It tastes better than a fried egg on toast. I started writing these blogs back in 2010 because I felt like spouting off. So why should things be any different in 2016? Okay I have less hair and can’t remember where I left my keys but why should any of that matter?

So onward with regulation.  My main point is that many of us who are not Rand Paul supporters immediately side with the pro-government regulation camp. Even Adam Smith believed that competition needed some oversight from the government. Smith believed competition is a very benign force for society. Business people might like to talk-up competition but some would prefer less of it. And I recall reading about market failure and how such failures mean that markets are not always self-medicating. I loved the topic of externalities – wherein an innocent third party gets negatively affected by business activity. A great example is the business on a river that pollutes the river making padded bras for ladies and as a result poor Nathan’s drinking water tastes like hydraulic fluid.

And the rest of us nod when our friends point out that police and fire protection are forms of government intervention. Naturally we want someone to objectively oversee the process of making sausages and medical devices. And we know that financial scam artists like The Fonz who misrepresent the benefits of reverse mortgages should be examined for head lice and their truth-telling.

So it is pretty clear that government regulation, like pole dancing, has a good side. Government regulation is here to stay and for many good reasons. But like pole dancing, it is worth pondering at least now and then if there is bad side. Looking for bad sides is not an activity cherished by many of us. How could there be a bad side of government regulation? After all, the mission is correct and government workers are underpaid servants of the people. Think of those nice workers at the airport who so gently and caringly pat you down as you shed your shoes, wallets, nail clippers, weed pipes, and other vestiges of your human dignity.

So the case is pretty strong for government regulation and even daring to analyze it makes me seem suspicious to many people. Larry don’t attack our government! But golly gee I am not attacking anyone. I simply want to ask some questions – is it possible that governments don’t necessarily make things better? If corporations can’t fix problems, then why are governments naturally better? Is it possible that governments sometimes have nice people but that temptation leads them down the wrong path? No, I am not going to answer all those questions. I am just saying…just because business creates problems it does not necessarily mean that something called government is the better solution.

Citizens evaluate government all the time. Private toll roads replace free government roads from time to time because it is believed that markets provide more efficient outcomes especially when Government George’s cousin Bob owns the local asphalt plant. Formerly Soviet Bloc countries have privatized many of their corporations as part of programs to create more efficient outcomes for their workers and consumers. I often wonder why I can’t choose Singapore Airlines to fly from Indianapolis to Seattle. Surely Delta customers would benefit from a bit more competition for domestic airlines.

It is okay to stay focused on government. It is possible that government has unintended side effects. It is possible that government over-does its mandate. It is desirable to scrutinize government as much as we watch over business. I won’t repeat any of the estimates of the costs of government regulation on the average firm and customer – because they are probably exaggerated. But they are real. Yup, we want a clean and safe environment. But we also don’t want to throw the baby out with the dirty bath water. Government regulations impede productivity and they raise business costs and negatively impact our nation’s economic growth. That’s for sure. We need to regulate government so that we get it just right – plenty of safety and plenty of growth!