Be Happy! The World Is Getting Better

Gloom and doom is just about all we get from the media and most pundits.  Take heart!  The world really is getting better.  Here, in an interview with Russ Roberts,  Joel Mokyr of Northwestern University explains why.

The audio file referenced above will take about an hour to listen to, but it's worth your time.  It's just an ordinary mp3 file, so download it to you smart phone and listen to it while you're commuting.

Fighting Povety in America

Here, Michael Tanner reports a startling fact:

In total, the United States spends nearly $1 trillion every year to fight poverty. That amounts to $20,610 for every poor person in America, or $61,830 per poor family of three.

Don't you suppose that just about any poor family of three would be tickled silly to have $61,830 in income per year?  Why don't we just give the poor the money and dispense with the 126 federal welfare programs that currently require bureaucrats to administer?

Money Illusion

Here, Philipp Bagus offers a crystal clear explanation of how the Fed and other central banks around the world are systematically misleading millions of people to believe that all is well.  All is not well.

By monetizing federal debt (so-called "Quantitative Easing" to the tune of $85 billion per month), the Fed is "papering over" past attempts to borrow something that had not yet been produced and saved (albeit with digital paper instead of real pictures of dead U.S. presidents).

Regular readers of EconoBlast need no reminder of the impossibility of borrowing something that has not actually been produced and saved.  New comers to EconoBlast can read all about it here.

 What does the future hold for Americans who are members of the Baby Boomer generation?  Will the financial claims many of us hold (stocks, bonds, savings accounts, and just plain money) have real purchasing power over the next two or three decades when we Baby Boomers expect to spend those claims on real goods and services?

Sadly, much of the financial wealth we Baby Boomers take ourselves to hold could turn out to be an illusion.  Just as Philipp Bagus reminds us in the article linked above, we cannot consume our financial wealth.  We can consume only real goods and services.

Will our economy produce the real goods and services we Baby Boomers financial claims are supposed to allow us to purchase?  The Fed is doing just about all it can get away with to make that possibility vanishingly small.  Please read the Bagus article linked above.  He's already explained it clearly, so I won't bother repeating his words.

Against all odds, I remain optimistic that our economy will produce the real goods and services necessary to honor the financial claims of Baby Boomers.  I remain optimistic in spite of the misguided policies of the Fed and our federal politicians.

I believe that technology will save us from ourselves, just as it has always done in the past.  Give the audio file you will find here a listen.  Put simply, advancing technology will almost certainly make America's $17 trillion federal debt irrelevant!  That distinct possibility is no excuse for the self-serving actions of the Fed and federal politicians, but it is nice to know.

In the nearby future, the combination of artificial intelligence, nano technology, and technologies not yet heard of will mitigate the scarcity of real goods and services so dramatically that most people living on planet Earth will enjoy a very high standard of living --- without working.

Some people think that not having to work will destroy society.  Other people (like me) do not think so.  Not having to work to keep body and soul together will be wonderful, not a scourge.  Am I just a fool with a dream?  You decide.  Listen to the audio file linked above before you decide. 

King BHO?

Hot off the Wall Street Journal

White House to Allow Cancelled Health Plans to Continue, Official Says
The White House will allow insurers to continue plans that have been cancelled, a Democratic official said.

The proposal may dissuade Democrats from backing House GOP legislation slated for a Friday vote. President Obama is scheduled to deliver remarks on the health law at 11:35 a.m.

Here's a question.  I thought the Patient Protection and Affordable Care Act (roll over George Orwell) was an act of Congress.  Since when in America is the President empowered to make up ad hoc provisions of a law at will?

Mendacity Means Lying

Here, Charles Krauthammer pretty much tells it like it is.  ObamaCare (a.k.a. the wildly misnamed Patient Protection and Affordable Care Act) will not work.  Nearly everyone, except BHO and his throng, have been telling us why for a long time now.

Now that the really bad stuff about Obama Care is kicking in, EconoBlast predicts that it will not be long before the House and the Senate set about making necessary amendments to the empowering legislation for ObamaCare.  Who knows, BHO might even sign an amended law, if the lay of the land under the current legislation starts exploding in his mendacious face.

Nearly everyone understands that our health care system "as is" isn't free-market capitalism.  Nearly everyone understands and agrees that reforms are highly desirable --- nearly everyone except the healthcare insurance industry, the pharmaceutical industry, and the hospital industry, that is.  These three big, rich, and politically powerful industries all stand to wax fat under ObamaCare.  So don't be surprised when these three big, rich, and powerful lobbies resist amending the PPAACA.

Alternatives for reforming our health care system have always been around.  EconoBlast archives offer several (here, here, here, and here).  When the House and the Senate do get around to amending the PPAACA, which they definitely will, with or without BHO in office, here are some principles that could and should guide their work (but likely will not, given the vested interests and political power of the three big, rich, and powerful lobbies).

1. Health care insurance should be privately purchased by individuals in a nation-wide market of competing companies.  State borders should be absolutely irrelevant.  Think automobile and homeowners insurance.  We should be seeing commercials on TV about how to save 15% on our health care insurance,  just like we see for autos and homes!
2. Health care insurance should be  INSURANCE, not pre-paid health care packages.  Insurance protects consumers from high-cost, low-probability events (e.g., events like wanting a heart transplant, treating stage-4 cancers, treating survivors of horrible traffic accidents, and the like).  We do not purchase insurance for changing the oil in our cars, cleaning the exterior of our homes, and the like.  We all expect those expenses to come around,  and we expect to pay for them out of pocket.  We should all expect to pay for routine, ordinary, entirely common health care out of our pockets, too.  After all, we pay for our food that way, unless we qualify for food stamps.  Why should health care be different?
3. Health care insurance should have nothing to do with where people work.  Individuals could and should purchase health care insurance in a national, competitive market that offers a variety of insurance plans that are suitable for each individual household. 
   
   Sixty-year old people will no doubt choose a policy that does not cover pregnancy.  People with an unusually high risk of breast cancer will no doubt choose a policy that covers treatment for breast cancer.  Insurance plans simply must carry risk-based premiums.  Anyone who understands the insurance principle and actuarial principles knows that anything else is not and cannot be INSURANCE.
   
   What about people with preexisting conditions, you say?  Preexisting conditions are a special case, and not a particularly large problem, by the way.  If Americans want to subsidize health care for people who have preexisting conditions, that's fine.  Congress can vote means-tested provisions to do so, if We the People want to elect members of Congress to do that.  But preexisting conditions is certainly no reason to embrace the insanity called ObamaCare.
   
   What about people who can't afford health care insurance, you say?  If Americans want to subsidize health care for people who "can't afford health care insurance", that's fine, too.  Congress can vote means-tested provisions to do so, if We the People want to elect members of Congress to do that.  After all, most of us do want to help people who truly need our help.  But again, people who cannot afford health care insurance is not a particularly large problem.  And again, that problem is certainly no reason to embrace the insanity called ObamaCare.
4. We could and should be presented with a price list each and every time we want health care.  When is the last time you looked at the menu of prices in your docs office?  Yea, right.  People who don't have to face a price don't really care what the price is.  We don't buy anything else that we consume without wanting to know the price.  Why is health care supposed to be different?  Can't answer that question?  Neither can I.
5. The supply side of health care simply must become much more competitive.  Not many people know about or talk about the supply-side restrictions our current health care system has built in. 
   
   Thousands of well-qualified students, graduates with a BS in an appropriate field, who want to go to medical school should not be turned away each and every year for lack of seats in medical schools, as they are today. 
   
   Yes, medical doctors are usually very smart people.  But so are people who earn a doctorate in tens of other fields like finance, accounting, engineering, and history.  Seats for training in these tens of other fields are not strictly regulated by Congress.  You get the picture, right?
   
   People with medical training that does not rise to the level of MD should not be prohibited from administering health care that they are well qualified to provide.  Nurses and nurse practitioners can and should be able to provide health care for many ailments and conditions they are currently barred by law from providing.  Pharmacists could and should be allowed to sell us medications and drugs that they certainly know the purpose and safe use for.  Truth be known, most MDs don't have much knowledge about drugs.  They get what they know from pharmaceutical sales reps.  Well trained pharmacists actually understand the information.
   
   It's fine for MDs to be certified.  Certification is a good practice.  We all like Consumer Reports, right?  Angie's List is a great idea.  But requiring licensing to practice medicine is just a barrier to entry that gives docs market power to limit competition.  Why should practicing medicine be different from practicing accounting?  CPAs are certified.  We go to a CPA when we think it's in our best interest to do so.  We go to a bookkeeper when we think a bookkeeper is all we need.
   
   If you want to know why health care is so bloody expensive, look to just two really, really important reasons:   (1) supply-side restrictions, and (2) health care expenses paid for Joe by Sally, with no prior knowledge of what the price will be.
6. Medications, drugs, and medical technology could and should cost just what it costs to manufacture and market them.  Monopolies on pharmaceuticals and medical technology should be banned.
   
   What about research, you say?  Let's pay for basic research in pharmaceuticals through our taxes.  Let's let our universities compete for dollars to support such research in competitive bidding through the National Institutes of Health.  Most people don't know that academics in research universities are already the driving force behind advances in health care drugs and technology.  Let's get it out in the open explicitly and sharply reduce the price of drugs.
   
   People who argue that we won't get advances in health care and drugs without patents just don't understand people very well.  The softwares Open Office and Moodle, both open-source software, are two great examples of people creating and maintaining advanced technology simply because they want to; it's what they do.  No patent necessary.  The same is true for medical research and innovation.  It's just what some people do, and they will do it regardless of patents that raise the price of drugs and health care technology.
   
   Research has shown that being first to market is important for making money with innovations.  Patents just raise the price to consumers and enrich the patent holder.  Is that really what we want in health care?

Additional details could be offered for Congress to consider to amend the PPAACA.  But the suggestions I offer above would get us a really long way down the road toward  meaningful and important health care reform.  ObamaCare will not.  Each day that passes will make that truth ever-more obvious. 

Go ahead.  Write your member of Congress.  But don't be too surprised when all you get back is a form letter from your member's staff that says your member of Congress thanks you and will certainly take your suggestions into consideration.  Don't be too surprised when none of the sensible suggestions offered above don't find their way into the sure-to-be-amended PPAACA.

Our House of Cards

The House and the Senate just added another story to our $17 trillion house of cards.  What that means, of course, is that when the house of cards finally does implode, the cards at the top have farther to fall.

Congress --- the House and the Senate --- proved once again that an unlimited government of men, instead of a limited government bound by law (remember the Constitution?), is dangerous.

Kick the can down the road, goes the metaphor.  And so it goes. Thank goodness Harry Reid and Mitch McConnell were able to save the day yet again!  Congress veered away from the fiscal cliff a few months ago, only to do a U-turn and head straight back toward it at higher speed. 

A government that will not be bound by laws will certainly be bound by men instead.  Our highest leaders' refusal to follow not just the Constitution, but even the rules that Congress itself wrote to govern its own behavior, speaks volumes.

Why am I wasting time this morning writing this pitiful refrain?  I really do not know.

What To Do About the Debt Ceiling

Here we are again.  Right back at the edge of the fiscal cliff.  I wonder what happened to those colorful words this time around?  The term "fiscal cliff" became all the rage just a few  months ago.

Government borrowing is not the problem.  Incidentally, Congress will raise the debt ceiling, but probably not for a few more days.  We haven't had enough political theater just yet.

Just like you and me, governments should borrow sometimes, but only for the right reasons.  Borrowing to finance productive activities (like successful businesses do) and borrowing to finance long-lived capital goods (like businesses and consumers do) is just fine --- provided businesses and consumers have reasonable expectations of being able to repay their borrowing.   Borrowing to finance continued transfer payments that cannot be sustained is not a right reason for governments to borrow.  What is hard to understand about that proposition?

More than two years ago, EconoBlast featured an article that seems completely timely today.  So, at the risk of boring regular readers, I point today to the EconoBlast archives.  You will find the article here.

Lot's of digital ink will flow over the next several weeks as Congress continues NOT to do its job.  Until Congress gets to the business of why we have Congress at all, the United States and the rest of the world will face the plunge.  It's a long way down, Mr. Speaker and Mr. President.  You both should be saying "not on my watch."

Saving, Not Borrowing, Will Heal America and the World

Here, Gregory Bresiger explains why saving is so vitally important to our nation's economic health.  Modern political thought, and sadly enough, what passes for main-stream economic thinking, even from Nobel Prize winners like Paul Krugman, tells us that borrowing to spend on consumption goods is the path to prosperity.

Borrowing has its place.  Most of us borrow at sometime in our lives.  But prudent people borrow for one of just a few good reasons.  People who borrow to finance a productive activity that will earn enough to repay the loan plus interest on the loan plus income to sustain themselves borrow prudently.  Business owners who produce and sell a product lots of people want to buy do this kind of borrowing all the time.   

People who borrow to purchase big-ticket capital goods (such as a house) that will generate a continuing future stream of value for them may be borrowing prudently, if they have a reasonable expectation of being able to make regular monthly payments over the life of the capital good.  Obviously, people who borrow without a reasonable expectation of being able to make those monthly payments do so imprudently and to their impending peril.  We have lots of experience in the recent past with that sort of imprudent borrowing.

What about borrowing by governments?  The guidelines for prudent and imprudent borrowing don't change just because its a government doing the borrowing.  Borrowing to finance productive activity --- activity that generate sufficient returns to repay the loan plus interest --- can be very prudent government borrowing.  Any number of people believe that a good example of this sort of borrowing is the American space program and its forays to the moon.

Government borrowing to finance spending on capital goods such as roads to somewhere lots of people want to go, bridges to somewhere lots of people want to go, and technology to defend ourselves from bad guys can certainly be prudent.  But only if the value streaming from those capital goods is sufficiently high, and only if government can reasonably expect to be able to repay the loans plus interest.

Government borrowing to finance current consumption with no reasonable expectation of repaying the loan plus interest is imprudent, just as it is if you or I borrow to finance current consumption with no reasonable expectation of repaying the loan plus interest.

I have written in EconoBlast more than once that you can't borrow what hasn't already been produced and saved.   Today's politicians don't seem to get that message.  Until they do, America's economic future is in jeopardy.  Europe's perilous economic future has already arrived in the body of the PIIGS.  Despite the lack of continuing mainstream media coverage, the PIIGS are not anywhere near out of the woods.  Some people think that the next stock market meltdown will be precipitated directly by the ongoing European debt problem, even though we haven't heard much about it in recent months.

Imprudent borrowing, like the borrowing the PIIGS have done and like the United States Congress continues to do, will be our undoing.  Saving like our grandparents and parents did could heal America and the rest of the world.  Regular readers of EconoBlast may be growing weary of it, but it's still true.  You can't borrow what hasn't already been produced and saved. 

Keynesian Policy Comes Up Short Again; My What A Surprise

Anyone remember all the dire, dour pronouncements of BHO and his Keynesian economists just a few months ago about how the across-the-board reductions (the sequester; remember?) in growth of the federal budget were surely going to cause incredible job loss and economic downturn?  I remember.

Remember how BHO and his administration instructed federal agencies to make cuts in the growth of federal spending (not real cuts, mind you) that would be most noticeable and irritating to folks --- such as furloughing  the air traffic controllers and closing federal parks.  I remember.

Did it come out that way?  No?  Hmmmm.  Live and learn.  Or more likely, live and fail to learn.

The federal government can't spend a dime without first keeping the dime's rightful owner from spending it.  People easily see the federal spending.  They don't see the foregone spending that's not done by the person the feds stole the dime from.  What about borrowing you say?  Well, we've been all through that on this blog.  You can't borrow what hasn't already been produced and saved.  Just in case you don't get that, read about it here.

Vote for the New Blood Party.   Let's get rid of the same-old, same-old hoots that have given us what we've got (that would be the 545).  Yes, yes, I know.  People who vote for the same-old, same-old don't read this blog.  That's why I don't write in it much anymore.  Nothing new to say.

Pumping, Pumping, Pumping --- Kablooey!

Here, Joseph T. Salerno of the Ludwig von Mises Institute provides spot-on analysis of the Fed's pumping, pumping, pumping tactics in its continuing backstop of the U.S. Treasury's machinations to continue expanding federal spending.

President Obama tells us the federal government simply must keep spending money, else we will surely suffer a dismal fate.  Never mind that the money the U.S. Treasury is spending is simply new money created by the Fed.

Somehow, I think that even people who have never studied economics or finance really do understand the vacuousness of the President's argument.  I think that most people really do understand my well-rehearsed pronouncement in EconoBlast, "you can't borrow what hasn't already been produced and saved."    

Check out the nearby chart, which is one of the most interesting in Salerno's analysis.

The chart "Total Household Net Worth as a Percent of GDP" reveals fascinating evidence for a dark hypothesis that I can't seem to shake, despite its tin-foil-underwear implications.  Allow me to explain.

GDP is the total dollar value of final goods and services produced within our geographical borders in a year.  Total Household Net Worth (let us call it THNW) is the dollar value of assets minus liabilities owned by American households.  Up until 2008, a whole bunch of that net worth resided in the form of residential housing.  A whole bunch still resides there, but not as much as in 2008.

Net worth is accumulated savings of households from income earned over time --- in a word, "capital."  Saving is that part of household income that is not consumed each year to sustain life and finance household consumption spending.  With those basic financial definitions in place, let's  explore the information revealed by the chart of THNW as a percent of GDP over time.

Just as Salerno says, THNW as a percent of GDP fluctuated in the band of 300% to 350% from 1952 through just about the end of the 1980s.  Notice, though, the downward trend in the ratio from the early 1960s through the decade of the 1970s.

Remember the decades of the 1960s and 1970s?  I do.  America was fighting the Vietnam war in the 1960s (I was in that war; draft, you know).  With that war dispatched, America began waging President Lyndon Johnson's "War on Poverty" near the end of the decade.  Throughout the decade of the 1970s, price inflation in the United States grew to reach 10% per year by mid-decade and approached 14% by the end of the decade.

Those of us who lived through the decades of the 1960s and 1970s pretty much understood that we were not really becoming wealthier as the prices of oil and gasoline continued their upward march with the Fed pumping furiously on the money supply.  America had to finance its misbegotten war in Southeast Asia and its War on Poverty somehow.  It did so through the graces of the Fed creating ever more money for the U.S. Treasury to spend.

Paul Volcker, Chairman of the Federal Reserve, appointed by Jimmy Carter in 1979 and reinstated by Ronald Regan four years later,  righted the ship at the opening of the decade of the 1980s.  Price inflation had to be stopped, and Volcker did just that.  He did it by bursting the bubble in U.S. Treasurys that his predecessor Chairs of the Fed, Arthur Burns and G. William Miller, had pumped up to finance the Vietnam War and the War on Poverty.

Following Volcker's bursting of what I will call the "Wars Bubble," the ratio of THNW to GDP stayed above 300% but below 350% until the mid-1980s.  The ratio began to grow in the mid-1980s as the economy enjoyed real growth, not inflation growth, reaching a new plateau just above 350% throughout the decade of the 1990s.

The decade of the 1990s, the most economically prosperous time ever on planet earth, saw the ratio of THNW to GDP rise to just above 350%, until mid-decade.  Beginning in 1996, the ratio began to rise on trend, topping 450% in the year 2000.  Of course the ratio began to rise.  The Fed, under guidance from Chairman Alan Greenspan, was pumping away, fueling what is now called the "Dot-Com" bubble in the stock market.

Like all financial bubbles pumped up by money creation --- a phenomenon that Salerno points out is a repeating event --- the Dot-Com bubble had to explode, and it did.  I remember the Dot-Com bubble well.  Everyone was getting rich quick in the stock market.  American households were elated with their new-found wealth.  But of course, the new-found wealth wasn't real; it was just a financial asset bubble.

The ratio of THNW to GDP plummeted, as it must, when the Dot-Com bubble burst.  But this time the Fed was determined to fight.  Greenspan continued to pump.  And a new bubble was born.  We know it today as the "Housing Bubble."  Pump, pump, pump went the Fed, and up, up, up blew the housing bubble.  Americans were once again riding high and getting wealthy.  Anyone could do it.  Even people who had insufficient income to borrow money to buy a car could borrow money to buy a house.

With the help of the Fed, the Housing Bubble raised the ratio of THNW to GDP to new, dizzying heights, pushing above 450% with a steely eye on 500%.  But, as always, like all other financial bubbles pumped up by the banking system, the Housing Bubble literally exploded in 2008.

But the new Fed Chair, Helicopter Ben Bernanke, would not take this bubble bursting sitting down.  Chairman Bernanke has led the Fed's pumping, pumping, pumping with previously unseen zeal since the bottom of the Great Recession, continuing to this day.  Guess what.  A new bubble has formed.  Asset prices in particular sectors of the economy are rising, rising, rising.  I wrote about this new bubble a few days ago here.

Do you think this new bubble will burst?  Of course you do.  It has to.  Now here comes the dark part that I can't seem to shake.  All that fake net worth above the 350% of GDP mark has to get wiped out somehow.  Real wealth is about real stuff.  Real wealth is not about money.  We all know that real GDP around the world is languishing, even as the ratio of THNW to GDP in  America is back on the rise, thanks to the pumping, pumping, pumping of the Fed.

So what's dark about that observation?  I don't think bubbles just burst naturally, anymore than I think that bubbles get pumped up naturally.  What's usually called "the business cycle" isn't a naturally occurring phenomenon like hurricanes are.  It takes a flawed banking system led by a central bank (or banks too big to fail acting in concert) to pump up an asset bubble.  Always has, always will.

World history, not just American history, is full of asset bubbles created by pumping, pumping, pumping fiat money.  The pumping requires the confluence of strong central governments and highly concentrated banking.  The banking can be highly concentrated under the leadership of a central bank (as it is now), or it can be highly concentrated under the collusion of a few big banks (as it was in the run up to creation of the Fed in America in 1913).

Everyone can't be wealthy at the same time in a world of scarcity.  But central banks can pump, pump, pump up asset bubbles for a time, creating the illusion of wealth.  But because it is illusory wealth, not real wealth, the fake wealth must be extinguished somehow.  Why?  Because paper wealth cannot long buy real goods and services in a world of scarcity.  As Robert Heinlein put it in The Moon Is A Harsh Mistress, "there ain't no such thing as a free lunch."  I call that line the "economic maxim."

Did you know back in 2008 when the bubble would burst?  Neither did I.  I knew it would burst, but I didn't know when.  But some people knew when.  That's the dark part.  Financial bubbles don't just burst.  After all, the pumping, pumping, pumping by the Fed could be continued to stave off the explosion.  Of course, continued pumping would eventually lead to a rising and high rate of general price inflation across all goods and services, instead of just rising asset prices.  The Fed cannot allow that; way too obvious what's going on if price inflation gets out of hand.  That's what happened in the decade of the 1970s, until Volcker burst the bubble on purpose in full view of one and all.

We humans learn.  The Fed has learned.  The Fed still pumps up asset bubbles, but it doesn't keep pumping so long that general price inflation gets way out of hand.  The new bubble in town will be burst.  I don't know when.  Wish I did; I could become very wealthy if did know.

If you have your 401(k) or your 403(b) back in the stock market just now, be forewarned.  If you have your wealth in U.S. Treasurys, thinking those will surely be safe assets, be forewarned.  If you have your wealth in corporate junk bonds just now, because the yield over U.S. Treasurys is the only yield in town, be forewarned.  Even if you have your wealth in Midwestern farmland acreage, just now, be forewarned.

Nearby is one more chart I stole from Salerno's excellent article.

The Wilshire 5000 index can be taken to be a record of what the stock market did over time.  Let's see; pumping, pumping, pumping --- kablooey!   Pumping, pumping, pumping --- kablooey!  The next kablooey may not be far away.  I don't know when, but someone will know before it happens.

This new bubble in town will also be burst.  Those few who somehow learn about the impending kablooey will not lose their wealth.  Only the dumb money will be lost.  The smart money will be out of the bubble assets just in time.  I wonder how the smart money will know when to leave

I hope that Peter Schiff (check it out here) is off the mark this time, but I don't really think he is.