CHALLENGE
THE PREMISE

Newsmakers

ARCHIVE - AUGUST 2015

Issues, News & Views

Who will be the
2016 candidates
for President of
the United States?


Republicans


DONALD TRUMP??

Donald Trump has come out
of nowhere and stolen the
show. He seems to have
captured the zeitgeist, the
spirit of the times. Can it last?



Who, from among this
strong, diverse field , will
emerge victorious to return
the GOP to the White
House?

COMPETITORS
With the inept Obama
Administration in its final
days, one would have
expected that experienced
governors with a record
of accomplishment would
dominate the Race 2 Replace
but outsiders and novices
Trump, Carson and Fiorina
are in the hunt! Seasoned
executives for sure, but
not the ones the beltway
had in mind!


Democrats


BERNIE SANDERS??

The creaky, rusty Clinton
machine grinds slowly
onward, wayward, relying
solely on muscle memory
for movement. Will
Democrats suddenly rise
from their slumber to the
realization she cannot win a
General Election?



Is Hillary a foregone
conclusion, or will
someone else swoop in and
steal the show?


COMPETITORS
Folks on the right can barely
contain their joy at the
prospect of a Clinton
candidacy. Shouldn't that
give pause to the Democrats?
Biden and Warren are both
better candidates and better
Democrats than Clinton, but
aren't even in the race. And
then there are O'Malley and
Sanders, again, both better
Democrats and better
candidates. Yet the Dems
seem intent on following
Clinton in a lemming-like
charge over the cliff.

THE FULL EMPLOYMENT ECONOMY

2015/08/12 - Like any other market, the labor market is composed of supply, and of demand; and the total labor in the economy is the intersection point of the two. Among the first tier of public policy priorities should be full employment - maximizing both the supply of and demand for labor so that virtually all workers will offer their labor, and virtually all employers will be willing to pay for it.

On the demand side, potential employers must be willing to hire based on pure economics, that is, it must be profitable to add an employee; and, hiring an additional employee must not create burdensome secondary effects.

On the supply side, potential employees must supply usable labor. Employees must be employable, having the necessary skills, background and experience; and, the whole societal package of incentives presented to workers must compel them to present their services to the labor market rather than choose an alternative course.

The public policy implications are immense. Full employment is an obvious public policy priority. Thus, policies should be in place to respond to these issues, along with the realization that any policies that impinge on these questions would subtract from employment.

Consider the regime of labor legislation that an employer faces – fair pay, non-discrimination, and so forth. The cost of compliance is high, which drives up the cost of hiring.

Too many ill-informed commentators with no understanding of economics lay the blame squarely in the wrong place, employing non-sequitur jazzed-up Marxist arguments to make Chicken Little claims that underemployment is the inevitable outcome of automation and improved productivity. Completely wrong

Speaking of Marxism, President Obama in 2011 blamed ATMs as a cause of high unemployment – because we were so much more productive, and our lives were so much more fulfilling, in the bad old days when we had to wait for an hour in a bank line? The basic flaw of Marxism is that it argues that the more labor it takes to make a product, the more valuable that product is. Sound like a President you know?

The fact is that automation creates jobs. Before the advent of the assembly line, auto manufacturing was an inefficient manual process. As a result, cars were very expensive and very few people could afford them. Crafting automobiles was a cottage industry offering limited employment Opportunities. With productivity improvements in automation and processes, cars suddenly became affordable to most Americans, and employment multiplied in the auto industry, not to mention the supplying industries – rubber, steel, etc. Employment rose as a direct linear result of increased productivity.

Ever-expanding interference by Big Government in the labor marketplace is the cause of persistent underemployment - the market never heals itself before more distortion comes along to disrupt the equation even further. Far too many legislative initiatives work together to dampen employers' appetite for labor, sending a chill down the spine of the demand side of the labor market.

We should be open to unwinding much of the tangle of red tape of labor law. Consider fair pay legislation. Without such legislation, the worst case is that a man might receive some premium wage; with the legislation, the worst case is that neither are hired and both receive an income of zero – the cost of compliance drives up the cost to consumers, reduces sales volume and sales revenue, reduces employment, and reduces sales tax and income tax revenue for the government while administering the legislation drives up the cost of government.

Anti-discrimination legislation has the same effect. Without a doubt there are employers who will discriminate against, say, African-Americans; but there are a multiple - five times as many? ten times as many? - who would discriminate in favor of African-Americans, for any of a host of reasons. But the potential for a race-based discrimination suit over a supposed wrongful missed promotion, meager raise, disciplinary action, or dismissal places costs and risks on business, costs and risks that disincentivize the most desirable hiring practices.

These are just examples meant to illustrate a point. The basic idea of fair pay or anti-discrimination legislation is noble and worthwhile. But attention must be called to the immense societal costs of all regulation. People respond to changes in public policy in directions and magnitudes that are rarely appreciated by politicians. The phrase "unintended consequences" is a cliché because they are automatic. Unintended consequences of legislation are the norm, and usually outweigh by far the intended good.

Politicians want to show a tangible “protection” they have provided for a constituency, so down the list they go looking for more and more constituents to provide more and more “protections” to; but by the time they have “protected” each of their constituents, they have done significant unintended derivative damage to the larger community, with negative repercussions for the special interest they intended to help. The totality of the damage done to a particular constituent is greater than the benefit derived from their single “protection”.

Consider the risks an employer takes in dismissing an underperforming employee, it would seem the equivalent of opening a Pandora’s Box. Yet politicians talk of creating even more “protections” for workers. But the problem for an employer – and thus for the potential employee - is that the more difficult it is to dismiss an employee, the less likely it is that the applicant would be granted employment in the first place. And that, in actuality, is when the Pandora’s Box is actually opened – when an employer opens the possibility of hiring an employee in the first place.

But just as damaging is Big Government's interference in the supply side of the labor market, by suppressing supply be paying people to not work, for subsidizing and thus incentivizing dismal life choices. Every time the government creates a new handout, it lessens the incentive to seek employment, or even to be employable. It is time for government to withdraw its distorting and dislocating disincentives from the labor market.

For example, Medicaid and food stamps should have a life-time limits - these programs should exist as intended, as a safety net, not a lifestyle. These programs must exist, but just as importantly, capping them will incentivize workers to return to the work force as soon as possible, both for their own good and the good of the broader economy. In addition, reducing the ranks of the recipients will reduce the strain on these programs and enhance their long-term viability. This shouldn't be controversial, but some will foment feigned fury nonetheless.

There should be separate assistance programs for the "can-nots" - the elderly (such as Medicare), or the genuinely disabled who are incapable of knowledge work. But for the "are-nots", all assistance programs should be subject to lifetime limits, perhaps five years. No more handouts for a "will-not" - a "will-not" is a "get-not".

It should be obvious that if we want more people hired, then Big Government should withdraw its tentacles from the labor market. It does far too little good, and far too much harm.

Policymakers should strive to make it easier, less expensive, and less risky to hire people. When it becomes harder, riskier and costlier to do something, less of it gets done. That should be obvious to everyone, even politicians. But too many politicians choose to ignore that reality so that they can brag about the latest legislative trophy they've stuck in their case irrespective of its miserable impacts.




Analysis


August 25, 2015 - It's still only always all about China - Shanghai closed down another 8% today. That's a 25% collapse over just six trading days, and 43% in three months!

However, it seems like our markets have found a bottom and are going to bounce off their lows, with the S&P up 2% out of the gate. The Dow lost over 500 points on Friday and again yesterday, but seemed poised for solid gains today, notwithstanding the chaos in China.

If the markets turning the tide against overseas threats puts you in the mood for a bit of patriotism, start at 0:52 after you click here.

The ChiComms operate a black box, some would even say a house of cards. But even if it isn't a house of cards - and probably isn't - there's no way to be sure of that either.

There is no perfect way to know for sure what is really going on there, but two good indicators are the prices of Copper futures and Vale SA stock. If those prices are going down - and they are - then global demand for raw materials is soft, and short term global economic prospects are lukewarm at best.




August 21, 2015 - It's only always all about China.

After showing some signs over the past month that the SSEC - with a lot of help - might be stabilizing, this week the bloodbath resumed. Today the Shanghai Composite dropped another 4% after drops of 3% yesterday and 6% on Tuesday.

And naturally other markets accross the globe have been following suit. Commodities are down of course. And our stock markets are having their worst week of the year - the S&P was down 2% yesterday, and today is shaping up no better.

It is time for the Fed to come out and declare that no interest rates increases are on the table this year. They have kept possibility open in order to keep markets from getting too hot, but now markets are beginning to freeze.



August 18, 2015 - We continue to worry about China, China, and China.

Today the Shanghai Composite dropped 6.1%, oil has plunged to Great Recession lows of under $42/barrel, copper continues to slide to Great Recession lows of under $2.30, and the share price of the world's largest iron ore producer Vale has lost over 60% of its value in the past year.

Faltering commodities markets, crashing Chinese asset prices, and desparate actions by Chinese policymakers, indicate that this may be the end of the great Chinese bull run, or at least the end of Phase 1.

An implication for policymakers is that the train has already left the station on Obama's vaunted "Pivot to Asia". Of all people, he should have lead us on a "Pivot to Africa". Oh, yes, the verb "to lead" - never mind. Another epic policy fail for Obama.



August 12, 2015 - Again we ask, what is going on in China? The place just seems to be getting less and less stable. And if they sneeze, do we catch the cold?

China's central bank has intervened for three consecutive days. The rate had been steady around 6.21 per dollar since March, but on Tuesday they pushed the CNY to 6.32, and today to 6.39.

Countries with strong economies don't devaule their currencies - that's what Greece should do, but can't because they are trapped in the Euro.

China's actions signal that their economy is decelerating, and worse, that they cannot solve it internally - devaluing the currency means China is willing to make other countries shoulder the burden.

The signs are ominous.


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