Fresh produce + what lies ahead 5.31.09

1. Germany may amend its constitution to ban budget deficits.

2. Russian perspective on American Marxism in 2009.

3. Bond vigilantes. Excerpt:

“There’s becoming an embedded inflationary premium in the bond market that wasn’t there six months ago,” Gross said yesterday in an interview at a conference in Chicago.

The US government is stuck in a very dangerous situation. They have chosen to prop up existing financial institutions with trillions of dollars, yet there are only three ways to get that money: raise taxes, borrow it, or print it. After decades of deficit spending the USA is now unable to raise taxes without strangling growth, borrow money without investors demanding higher interest rates, or print money without risking severe inflation.

The simplest solution is to face the reality that there is no money left for entitlements. The people and the government are to blame for attempting to live beyond their means for so many decades. Germany is cutting spending massively - Obama is spending $634 billion as a down payment on universal health care entitlements. It does not appear to me that the US government is even considering facing the reality that there is no money left for entitlements.

4. The government took on $6.8 trillion in new obligations in 2008, pushing the total owed to a record $63.8 trillion.

Someone will have to pay for this. Maybe this generation, maybe the next generation, but reality will eventually make its presence felt. Unfortunately in this case it will not be gentle.

Fresh produce from the link farm - 5.28.09

1. Green totalitarianism.

2. Balanced perspective of wealth discrepancy in the USA.

3. Where did the TARP money go?

4. Treasury yields rise (see chart), China worried but agrees to keep buying US debt. Of course it doesn't make much of a difference because we'll always have someone to buy our debt.

Fresh, fresh links 5.22.09

Moody's making some realistic assessments, good sci-fi reads, Peter Schiff marginalized, and a lively exchange between a lefty pundit and Ron Paul (as T.O. would say, get your popcorn ready!).

1. The top 10 libertarian science fiction stories.

2. Time Magazine doesn't take kindly to Peter Schiff.

3. Ed Schultz (who?) "debating" Ron Paul on the merits of the Department of Education and Department of Agriculture.

4. Downgrade, downgrade, downgrade, and then maybe downgrade some more!

What is seen and what is unseen for May 21, 2009

In keeping with the general theme of this web log, I would like to illustrate the principle that Frederic Bastiat so keenly illustrated in his parable of the broken window. A good economist will take into account the effects of an action or policy on all groups, across all time scales. With that in mind, let's take a look at a new policy proposed by Rep. Alan Grayson (D) from Florida.

The Paid Vacation Act will:

"...require companies with more than 100 employees to offer a week of paid vacation for both full-time and part-time employees after they’ve put in a year on the job. Three years after the effective date of the law, those same companies would be required to provide two weeks of paid vacation, and companies with 50 or more employees would have to provide one week."

Sweet! Who doesn't like vacation, right? The idea here is that more vacation days increase worker productivity and happiness, and result in people using less unnecessary sick days. These developments are claimed to stimulate the economy. They certainly sound good. What worker wouldn't want more paid vacation time? These workers would most probably be happier and may be more productive as a result.

Here is what we'll see if the bill is passed: more people on vacation and a boom in the travel industry. Will overall productivity increase? Let's look at what is unseen:

• Requiring businesses to provide paid vacation raises the costs for business because workers are being paid not to be productive. If the cost of business increases, it becomes more difficult for employers to hire new workers. Some workers might even have to be fired for the business to continue running at a profit. We don't see the workers retained or barred from entry.
  
• Employees are currently producing during what would become paid vacation. The money they earn from their production may not go to the travel industry, but it would go somewhere - and the community will be richer for it. For example, the workers in a TV manufacturing plant will have produced 100 televisions and have money in their pockets to spend on home improvements. Now the community has more TVs and job growth in the home building sector. We wouldn't see either of them.

Just for kicks, lets examine unintended consequences as well. Mandatory paid vacation time effectively subsidizes an unproductive activity, and doesn't remove the incentive for people to use sick days. This is what happens when subsidies are introduced into the marketplace: demand goes up because the good is perceived as "free". Once workers get a taste of paid vacation time they are likely to demand more of it. Thus a more likely scenario is that people will begin to use both paid vacation and sick days, and in time demand an increase in the number of paid vacation days. The article cited unwittingly points out the truth of this.

"France currently requires employers to provide 30 days of paid leave."

The Paid Vacation Act will restrict employment capacity, lower productivity, and restrict the community's ability to accumulate wealth. At least we'll see more Americans taking vacations during these tough times.

Elihu Root and the Federal Reserve

Senator Elihu Root (1845 – 1937) in his prescient understanding of central banking and easy credit:

“Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community. . . . Bankers are not free from it. They are human. The members of the Federal Reserve board will not be free of it. They are human. . . . Everyone is making money. Everyone is growing rich. It goes up and up, the margin between costs and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.”

Who knows if he had heard of the Austrian Business Cycle Theory, but for someone speaking during the creation of the current US central bank, he had a clear vision of what would happen in 2008. This reference was made known to me by a good speech from Thomas Woods.

Fresh produce from the link farm - 5.20.09

Russia's revisionist history, gold coming out of ATM's, our soon to be booming auto industry, and Ron Paul's state of the union address, sort of.

1. "He who controls the present, controls the past. He who controls the past, controls the future."

2. Why auto sales will skyrocket.

3. Where gold comes out of ATM's.

4. Current conditions or just a bad dream?

What is seen and what is unseen for May 18th, 2009

Borrowing from Fredric Bastiat, here is today's edition.

Take a look at this map illustrating where stimulus dollars are planned to go for highway reconstruction and infrastructure. Billions of dollars are allocated in this map, for the purpose of "jumpstarting the economy". Kind of like stimulus checks, only made of asphalt. Stimulus asphalt.

When these projects are completed, this is what you will see. Smooth new highways and bridges, and we'll all thank the government for it. What we will never see, however, is where the billions would have gone otherwise. You'll never see a new first home being bought, the new small business, the new investments in technology and medicine, or any other choice of the marketplace. Maybe those businesses and investments would have failed, but we will never know.