Tuesday, December 29, 2015

The Federal Reserve Feeds the Federal Government With Free Funds

Since the eruption of the financial crisis, the balance sheet of the Federal Reserve System (the Fed) has increased to a factor of 5.2, from $867 billion on August 8, 2007, to $4,497 billion on December 23, 2015. This resulted from several rounds of Quantitative Easing (QE) in which the Fed bought Treasuries and other securities.  Total assets have remained virtually unchanged in the past 12 months.  The Fed has not reduced its holdings of Treasuries or other securities.

The US Treasury has been a beneficiary of the Fed's accumulation of securities in that the Fed earns interest on them.  Each year the Fed transfers the balance of its earnings to the Treasury after deducting its own expenses.  This sum has grown from $31.7 billion in 2008 to an estimated $98.7 billion in 2014.

The nearly $100 billion is free money for Congress to spend without its having to vote for a tax increase of this magnitude or, under a spending limit, enables the Treasury to borrow $100 billion less.

Some economists fear that the Fed's large balance sheet could unleash inflation when and if it sells off some of its securities into the market. Others fear that the large balance sheet may complicate efforts to stimulate the economy if it falls into recession.  Who knows?  I'll let the monetary economists sort that out.

What is clear is that the Treasury and Congress are happy with the now $100 billion transfers that enable less borrowing or more spending without additional taxation.

Thursday, December 10, 2015

Update: America Has No Arab Allies

On December 9, 2015, Secretary of Defense Ashton Carter testified before the Senate Armed Services Committee. 

His comments state the reality of so-called Arab allies.

Carter acknowledged a missing element in the campaign: a more assertive role by Sunni Arab allies from the Gulf in the effort against Islamic State, a Sunni extremist group.
He said the United States had spoken to Gulf Cooperation Council leaders at a Camp David summit in the spring about creating a "Sunni Arab combined force" to help in the fight.
"That has not materialized among them," Carter said.
He suggested Sunni forces might not need to occupy territory but instead work at "enabling local forces."
That's a strategy that the United States moved decisively toward in October, when it announced it would send dozens of special operations forces to Syria to coordinate with rebels.
The United States last week announced plans to deploy elite American military teams to Iraq to conduct raids against Islamic State there and in neighboring Syria.
Carter told the Senate hearing that he was in touch with coalition partners to ask them to contribute special operations forces, including from the Gulf. The United States also sought other capabilities, like strike and spy aircraft, weapons and munitions.
"I too wish that particularly the Sunni Arab nations of the Gulf would do more," Carter said.

Tuesday, December 8, 2015

Swedish Banks Are Government Informants

Sweden is the leading example of a "cashless" economy.  Currency in circulation has been steadily declining in recent years, reaching a low of SEK 68.9 billion on October 15, 2015.  That amounts to SEK 7,153 (US$ 844) per person.  (Coins add another SEK 5.3 billion in circulation.)  New electronic payment systems are accelerating the move away from cash.  

Note the requirement imposed on banks that still deal with cash.  Any person conducting a cash transaction in such a bank will have to declare how he (she) acquired the notes and coins, and the bank in turn has to report the information to the police.

In comparison, the value of U.S. currency in circulation, $4,300 per person as of December 31, 2014, continues to rise each year (although more than half is estimated to be held abroad).  In accordance with the Patriot Act, U.S. banks are required to report to the Department of Homeland Security all transactions exceeding $10,000, although some will report transactions exceeding $5,000.

Still, Americans are relatively free to conduct cash transactions between themselves and between themselves and financial institutions. Swedes are not.  Welcome to the Scandinavian version of Brave New World.

Monday, December 7, 2015

Who are America's Arab Allies? Do we Have Any?

Those Democrat and Republican presidential candidates that propose to defeat ISIS by putting 10,000-20,000 troops on the ground to advise and assist our Arab allies repeat over and over again that our Arab allies will have to bear the brunt of the load in supplying troops.

None of these candidates has yet named our Arab allies.

Do they include Saudi Arabia?

The Emirates?  Kuwait?  Qatar?  Iraq?  Iran?  Egypt?  Yemen? Libya? Tunisia?  Morocco? Jordan?

Aren't these the same Arab allies that have been supposedly in the forefront of  helping the U.S. rid the region of Al-Quade and now ISIS with little success?

How about asking each candidate who wants the U.S. to build a coalition that relies on our Arab allies to tell us who they are?  Why would it succeed this time when it has failed since the emergence of ISIS?

Wednesday, November 25, 2015

Why Trump Can Win BIG

Return with us to those thrilling days of yesteryear, June 6, 1978, when voters approved Proposition 13in California by a landslide 65-35 percent. Proposition 13 is a constitutional amendment that limits property taxes to 1 percent of a property’s market value based on sale price and limits increases to 2 percent a year.

Proposition 13 was opposed by the political, economic, social, and educational establishments.  A partial list of naysayers included the AFL-CIO, the California Teachers Association, the American Federation of Teachers, the California State Employees Association, County and Municipal Employees, Bank of America, Atlantic Richfield, Standard Oil, Common Cause, the League of Women Voters, the California PTA, the League of California Cities, the Democrat Party, every major newspaper except the Los Angeles Herald Examiner, the vast majority of state legislators, the 58 county boards of supervisors, most city councils, most school board members, Governor Jerry Brown, and two Republican candidates for Governor, Pete Wilson and Ken Maddy.  Opponents massively outspent supporters.

Opponents ran a campaign of fear against Proposition 13.  Radio advertisements repeated that seven past presidents of the American Economic Association and 450 economists teaching in California’s universities, colleges and community colleges warned that cutting $7 billion from property taxes would savage state services and thousands of public servants would lose their jobs.

Pollsters and analysts rushed to explain Proposition 13’s unexpected victory.  It was simple.

Even a majority of policemen and firefighters voted for the measure despite being warned that they would likely be the first to lose their jobs.  Many told reporters that while they might lose their jobs, they were sure to lose their homes to skyrocketing property taxes unless something was done to halt government greed.

The parallel with Trump is clear.  A large number of Americans are fed up with the establishment and its threats.  The election of 2016 could well turn out to be a reprise of Proposition 13.

Monday, November 23, 2015

Beware of Economists Calling for More Government Funding of Government Data Collection

Sixty-three distinguished economists signed an open letter to Congress urging increased federal spending for government agencies charged with collecting economic data.

In particular, they want more data on assessing GDP, understanding labor markets, and better statistical poverty measures.

What are economists likely to do with better data if their letter succeeds?

My guess is to advocate more funding to fight poverty, not more efficient use of existing appropriations.

More government funding to support greater participation in labor markets, not removing regulations, high taxes, and other impediments to labor market participation.

More stimulus to increase GDP, not less government interference in the economy.

More redistribution to reduce income inequality.

And so on, and so forth.

Delusions of Democracy in the Middle East

Those whom the Gods would destroy they first make mad with delusions of democracy in the MiddleEast.

The following article, "The Freedom Agenda Has Failed," is presented with no comment.

Sunday, November 15, 2015

Students Rally For Divestment--But From What?

The Global Climate Change Summit will be held in Paris during November 30-December 11, 2015. Its goal is to set out a schedule to limit greenhouse gas emissions.  Every important political leader in the world will attend.

In advance of the summit, students are holding rallies, encouraging their universities to divest from companies that produce fossil fuels (oil, natural gas, coal).  Stanford, for example, has divested from coal-producing companies (but not companies, such as steel, that use coal).

Divesting from oil is more problematic.  Even the most ardent opponents of fossil fuels still fly and drive, some daily.  While about half of oil production goes into fuels, the rest is used in the production of some 6,000 products.  Here are several web sites you can copy into your browser that list some of the most common consumer products in which oil is used:




Renewables are fine but not until their costs become more competitive with fossil fuels.  That is still some time away.

Pardon the pun, but expect to see a lot of hot air emanate from the Paris summit!

Thursday, November 12, 2015

Flat Tax Plans Dominate Republican Candidates Tax Proposals in the November 10, 2015, Fox Business News-WSJ Debate

On December 10, 1981, my distinguished colleague Robert (Bob) E. Hall and I first proposed our flat-tax plan in the editorial pages of the Wall Street Journal.  We followed it with a book in 1983, which we updated in 1985, 1995, and 2007 (the latest edition is free to download and print from the Hoover Press).

Imitators followed in short order.  With very slight adjustments to the tax rate and personal allowance, Dick Armey and Steve Forbes proposed identical plans.   (As politicians, they attached their own names to the plans.  A politician cannot run for office using the names of two academics as the authors of their plans).

Art Laffer wrote a different kind of flat tax for Jerry Brown in 1992 and asked me to serve as Brown’s spokesman for the plan, which I did for six weeks.  Laffer has written similar plans for Rand Paul and Ted Cruz, differentiated by rates on gross business income minus investment (effectively a VAT) and personal income.

Ben Carson has an across-the-board 15 percent and Rick Santorum 20 percent flat taxes.  Jeb Bush, aided by some of his brother’s former advisers, has proposed a modification of George W’s tax legislation.  The others are talking in terms of lower rates and fewer deductions.  Carly Fiorina wants a three-page income tax; Hall-Rabushka's draft law is three-and-a-half pages long.  Marco Rubio is an outlier, with a top rate of 35 percent in his plan co-authored with Senator Mike Lee.  (The Tax Foundation has an excellent table, which updates and compares all the candidates tax proposals, both Democrat and Republican.)

One or another version of a flat tax has been adopted in over 40 jurisdictions worldwide, most following the collapse of the Soviet Union.  Others are under consideration in the Isle of Man beginning April 1, 2016, and in Italy, Ireland, and Poland in preparation for their next national elections.  (Our book has been translated into Italian and Polish).

Will the United States have a flat tax anytime in the near future?  It depends first on who becomes the Republican nominee, and if he (she) wins.  Second, Republicans must retain majorities in both branches of Congress.  Third, the Senate must be prepared to use the nuclear option, if necessary, to defeat a filibuster.

No one would have predicted in 1981 that over forty countries would have a flat tax in 2015, or that Western Europe would have several countries considering a flat tax.  Good ideas with strong marketing can overcome inertia, special interests, and establishment politicians with their Praetorian Guards of academic advisers, and such international organizations favoring steeply graduated income taxes (in the guise of fairness) as the IMF, OECD, World Bank, and numerous left-leaning think tanks.

Your friendly proprietor has racked up hundreds of thousands of miles traveling the globe to explain the flat tax and support flat-tax movements.  I frequently receive requests from foreign countries in Africa, Asia, Central and South America, the Caribbean, and the Middle East to explain the details and benefits of the Hall-Rabushka flat tax.  I have written flat-tax plans for several countries to show how they can replace their harmful, complicated, multi-bracket tax codes to improve compliance and growth.

On personal note, it is gratifying to see thirty-five years of work bearing fruit.

Tuesday, November 10, 2015

Something is Rotten in the State of Denmark

Democrats, candidates for higher office, economists, and celebrities (Oprah), love Denmark as an example of a high-tax, big government, all-encompassing welfare state that works.  Your friendly proprietor is still waiting for an exodus of these Dane-loving Americans to apply for permanent residence in Denmark.

Having visited Denmark numerous times beginning in 1967, most recently in 2005, I can say that Tivoli Gardens is fun in summer, the old castles and palaces are charming as elsewhere in Europe, and that fresh Danish pastry cannot be surpassed anywhere in the world.  Good beer. Danes are among the top English-speakers in the world--do we expect tourists to speak Danish?  Denmark is a lovely place for a three-day visit, if you can afford it!

But those features are overwhelmed by Denmark's shortcomings.

Pickled fish.
Dreadful food, except for perhaps the three-star $200 lunch.
Cold and dark eight months of the year.
Tiny.  One can get around the entire country within a day.
Oppressive taxation.
Unpronounceable language (so say the Norwegians and Swedes).
Weak higher education.

The latter needs some detail.  Higher education may be free for Danes in exchange for high taxes, but what about its quality.  Denmark's highest ranking university, the University of Copenhagen, stands at 82 in the Times Higher Education list of the world's top 100 universities (the only one in the top 100), 69 in the QS World Ranking, 61 in the U.S. News list, and a somewhat better 40 in the Shanghai Jiao Tong list (along with the Aarhus University at 74).

Danes rank high on the list of happiest people in the world.  One person's happiness may be another's quiet resignation.

I am open-minded and flexible in my beliefs, but as a native Missourian, show me!  Please let me know when dozens, okay, I'll settle for 10, prominent leftist Democrats move to Denmark.

Monday, November 9, 2015

Definition of a Politician

Sir Henry Wotton (1568-1639), an English author, diplomat and politician who sat in the House of Commons in 1614 and 1625, is credited with the following statement:

"An ambassador is an honest gentleman sent to lie abroad for the good of his country."  He said that on a mission to Augsburg in 1604.

Your friendly proprietor proposes a corollary (fast forward 411 years):

"A politician is a person, honest or otherwise, who is paid to lie to her (or his) own country."

Friday, November 6, 2015

Why Political Polls Have Become So Inaccurate

The “Shy Tory Voter” phenomenon has come to America.  On May 6, 2015, election eve in the United Kingdom, British polls showed the Conservative and Labor parties in a tie.  The outcome shocked everyone.  Conservatives trounced Labor, winning an absolute majority in Parliament.

Pre-election polls for the November 3, 2015, mid-term elections in the United States were way off the mark.  Projected Democrat victories turned into convincing Republican wins.  Liberal ballot measures went down to defeat, even in San Francisco!

Polling is a skill that requires making all kinds of assumptions about the electorate from a small sample of telephone interviews or online respondents.  But something has happened in the electorate that’s producing wildly inaccurate projections, a phenomenon that pollsters cannot estimate.

Your friendly proprietor believes that voters are treating pollsters the way politicians are treating their constituents.  Few political candidates are truthful in their statements about reality, other candidates, or their intentions.  In short, politicians lie, and the people know it.

Voters are sick and tired of being lied to.  In response, they have taken to lying to pollsters.  The universality of political correctness, which means that you cannot speak the truth on any controversial topic, because someone or some group will say it is hurtful, has filtered down to the business of polling.  Voters are increasingly lying to pollsters to avoid saying anything that might be deemed hurtful, but have no such concerns in the quiet secrecy of the polling booth.

If this supposition is correct, Republicans will win massive victories In November 2016.

Tuesday, November 3, 2015

How About an Index for Real Clear Politics Lies?

Real Clear Politics publishes the results of each presidential popularity poll as it is released along with a seven-day rolling average.  How about an index for political lies?

Lies can be defined as follows (the list is not exhaustive):

Whoppers.  Bald face lies.
Big lies with the barest hint of truth.
White lies.
Quoting out of context.
Alleged forgetfulness.
Plausible deniability.
[Fill in others].

Lies could be placed on a ten-point scale, with 10 signifying a Hitler-level lie, and 1 an itsy-bitsy fib.   Cumulative points could indicate the extent of a politician’s lying.  All past lies could be entered into the index as a starting point on a politician’s history of lying, and as a baseline to see if candidates increase or decrease their lying as the campaign proceeds.

The committee (much like the FCS ranking beginning on November 3, 2015) should be drawn from non-partisan, professional politician watchers.  Every network, radio program, blog, Facebook post, and tweet that covers presidential campaigns should report the daily index update.

Wednesday, October 21, 2015

What "Ask" Means in Canada-Speak

Canada's Liberal Party won an outright majority in Parliamentary elections held Monday, October, 19, 2015.

Among its promises was giving middle-class Canadians (those with annual taxable income between C$44,700 and C$89,401) a tax break by making taxes more fair.  The Liberal Party promised to cut the federal tax rate from 22 percent to 20.5 percent, a saving of C$670 per person per year (about C$3 billion total).

How is the new government going to "pay" for this tax cut?

It will "ASK" the wealthiest of Canadians to "GIVE" a little more.

That's nice. The Liberal Party will [politely] ASK those earning over C$200,000 to give little more.

But to insure that the wealthiest one percent give what is asked of them, the Liberal Party will impose a new 33 percent tax bracket, four percentage points higher than the current 29 percent top marginal federal rate.

Sunday, October 18, 2015

Forget Denmark. America Should Be More Like Sweden

What Bernie Sanders and Hillary Clinton won't tell you about Sweden:

No capital gains taxes.
No inheritance tax.
Better K-12 English language instruction than in Arne Duncan's America.
Much less crime than in Chicago.
More homogeneous population (less diversity).
Less obesity.
Lower level of political corruption.
Honest journalists who report rather than editorialize the news.


Prettier women
Handsomer men (for the ladies).

Wednesday, October 14, 2015

Trump Disrupts the Political Establishment’s Praetorian Guard

The political election industry is a multi-billion dollar enterprise.  Its ranks include the following:

Ad Producers
Focus Groups
Media Pundits

The industry is used to dominating presidential elections.  It is the go to crowd that determines who deserves to be a candidate, win each party’s nomination, and ultimately secure the presidency.  The industry regards itself as uniquely qualified to determine who is qualified to participate in the political process.

Now you understand why Trump has come under a withering barrage of criticism.   How dare he intrude in the “club?”  How dare he campaign for the presidency without the blessing of the “club?” How dare he use his own money without super-PACs?  How dare he expose his critics? How dare he use social media to bypass the political industry?  How dare he draw large, enthusiastic crowds?  How dare he speak the language of the American people instead of the prepped, canned language of the political class?

You see, it’s not so much that he is running as a Republican that frightens the political establishment.  It fears that if he wins, others could seek office in the same way.  A Trump victory threatens to put the political industry out of business as it is now.

How did Claudius become emperor of Rome?  After the assassination of Caligula, the Praetorian Guard anointed Claudius emperor.  “Why,” asked Claudius?  “Because,” said the head of the Guard,” without an emperor, there is no need for the Praetorian Guard.

Without traditional candidates like Clinton, Bush, Kasich, Huckabee, Christie, Santorum, Pataki, and others, there is no need for the Political Establishment's Praetorian Guard.  Trump threatens to undermine the political establishment order of things.

Saturday, September 19, 2015

German Chancellor Angela Merkel should read The Camp of the Saints

In 1973 Jean Raspail published an apocalyptic novel entitled The Camp of the Saints.  It was a story depicting the destruction of Western civilization, which began innocently enough with the Belgian government announcing in Calcutta, India, a policy of adopting Indian babies and raising them in Belgium.

This well-intentioned policy led a "wise man" to rally the Hindu masses of India to undertake a mass migration to Europe.  They arrived first in France by the hundreds of thousands with no regard for lawful entry requirements.  They showed no desire to assimilate into French or any Western culture. Europe and ultimately all of Western civilization capitulated to the Hindu masses.

Replace the Belgian government with Angela Merkel.  Replace the Hindu masses of India with the Muslim masses of Pakistan, Afghanistan, the Middle East, and North Africa.

Of course it can't really happen in Western Europe in 2015, can it? Chancellor Merkel did everything possible to keep Greece in the Eurozone to prevent its breakup.  But her encouragement to accept hundreds of thousands of Muslim immigrants in Germany has brought a backlash throughout the European Union.  

Perhaps the defining feature of the European Union is the Schengen Agreement, which permits visa-free travel across its members' borders. Those borders are on lockdown across a growing number of EU member countries in September 2015.

The best laid plans of mice and (wo)men.......

Wednesday, September 16, 2015

President Xi Jinping of China Comes to America, Again

President Xi Jinping of China arrives in the United States on September 24, 2015, for an extended visit that includes a summit with President Barack Obama on September 25 and a speech at the United Nations on September 28.

China experts--economists, political scientists, government officials, politicians, businessmen, and countless journalists, television commentators, pundits, and bloggers--will interpret every nuance of Xi's public remarks, facial expressions, gestures, places he visits, and so on.

The White House will claim that President Obama is talking tough with President Xi on China's island building in the South China Sea, cyber-security, intellectual property rights, the exchange rate of China's currency, and other matters of importance to the United States.  What goes on  behind the scenes will be subject to endless speculation. 

Thoughtful Ideas can help you, the reader, get a handle on the outcome of President Xi's visit.

Your friendly proprietor studied Mandarin (and a smidgeon of Cantonese) in Hong Kong in 1963, along with years of Chinese history, culture, economics, politics, art, and other aspects of Chinese life. Taking creative license with Chinese grammar for euphonic effects, I wrote a short couplet that describes contemporary Chinese behavior.

My eight-character couplet (eight for good fortune):

Ni yao, ni shuo
Wo yao, wo zuo


You say what you want
I do what I want

President Xi will listen patiently to President Obama and everyone else he meets during his visit. Upon returning home, he and his colleagues will do what they want, much to the dismay of what the experts said about the agreements that were presumably reached with American officials and business leaders.

In short, pay no attention to the chattering classes that try to interpret his visit for you.

Friday, August 21, 2015

Wy Greece Got Its Bailout

First, Europeans must never be deprived of their sacred right to a summer vacation.  The negotiations that begin early in 2015 were concluded in principle just in time for German Chancellor Angela Merkel and her fellow Eurozone leaders to take their annual summer vacation.

Second, Merkel did not want to be blamed for any dissolution of the eurozone, which would tarnish her place in history.

Forget every other explanation that economists have put forth, and will continue to offer, why Greece had to remain in the eurozone for its own good and that of Europe.

This third Greek bailout of $95 billion will see Greece through this year and next, insuring that Europe's leaders can look forward to their 2016 summer vacation with equanimity.

Don't laugh!  Remember, World War I broke out on July 28 and World War II on September 1, leaving time for summer vacations in both periods.

Thursday, July 16, 2015

It's time for a Little Honesty on the new Greek Bailout

Greece and its creditors--European Commission members, the European Central Bank, and the IMF--have been playing a game of pretend to oppose austerity and pretend to keep Greece in the Eurozone.

Neither matters nearly as much as enabling everyone involved to go on their European Charter guaranteed right of five weeks vacation beginning the last week in July and extending through the end of August.  Summer vacation is sacrosanct in Europe. Neither rain, sleet, hail, tornadoes, floods, heat, cold, fire, wind, earthquakes, or any other crisis can be allowed to disrupt the summer vacations of the residents of Europe's social market economies.

So to all our European friends, bon voyage and guten appetit! September will be soon enough to deal with any Greek problems that remain unresolved.

Friday, May 8, 2015

Identity Politics in the United Kingdom

Why did the pollsters get it so wrong in the United Kingdom?  How can this be?

The pollsters were not willing to accept the rise of identity politics. They could think only in conventional class terms of right vs. left, Conservative vs. Labor.. 

Identity prevailed:

Scots voted for Scotland (the Scottish National Party).
English voted for England (the Conservative Party).

Diversity failed:

Diversity oriented Brits voted for a United Kingdom (Labour, Liberal Democrats).  They were trounced.

Ethnicity is now the dominant factor in British politics.  Get used to it.

Wednesday, April 22, 2015

Simple Arithmetic for California's Water Crisis

In 2013, California state GDP amounted to $2,220 billion, of which $46.4 billion (2.1%) was contributed by agricultural commodities.  All other output amounted to $2,173.6 billion (97.9%). 

In 2013, urban use of water amounted to 8 million acre-feet (AF), about 10% of state water resources. Irrigated agriculture consumed 23.9 million AF (41% of total), while environmental usage took 29.2 million AF (49% of total).

California agricultural statistics can be found here.  In 2013, the top 20 commodities ranged from a high of $7,618 billion for milk and cream to a low of eggs and chicken of $380 million.  But water usage does not correlate with the dollar value of output of each of these commodities.

Blaine Hanson in the Department of Land, Air and Water Resources at the University of California, Davis charts water use of California crops on page 4 of his report.

Here are a few shocking calculations.

Alfalfa amounts to $1.57 billion of output using 5.3 million AF of water.  Divide the value of output by the amount of water used yields $296 per AF.

Rice output is valued at $790 million, using 2.7 million AF of water. This amounts to $293 per AF.

Cotton output is valued at $623 million, using 2.3 million AF of water ($271 per AF).

All other non-agricultural state output amounts to $2,175 billion. Using only 8 million AF yields output valued at $271,875 per AF. Urban use produces 925 times as much output value as each of three of agriculture's most thirsty crops. (Except for pasture, all other cash crops produce higher valued output per AF of water than alfalfa, rice, and cotton.)

Alfalfa and rice use as many AF of water as all urban usage.  It is true that urban water usage can be made more efficient, enough to meet Governor Brown's statewide mandatory reduction of 25%.

But what if the drought continues for 1, 2 or more years?  Should California continue to allocate 8 million AF of water to growers of hay and rice?  This makes no sense, never mind historical rights. It's vital that the state legislature get cracking with a comprehensive overhaul of water usage (the Australian solution would be a good place to start) so that it can enact legislation if the drought continues through the 2015-2016 rainy season and beyond.

Thursday, April 16, 2015

Analysts Were Looking For a Number.....

that was [higher, lower] than actual [earnings, jobs created, unemployment rate, trade deficit, last quarter's GDP growth, etc.].

For example, the first Friday of the month (April 3, 2015) "New Jobs Created Report" for March fell dramatically short of consensus estimates.  Not a single prominent business or academic economist has stepped forward to claim an accurate forecast. Dozens of business and academic forecasters that were wildly inaccurate scrambled to find reasons why they were so off-target.

And yet, the Congressional Budget Office, Treasury, Office of Management and Budget, Social Security Trustees, private business forecasters, and professors routinely issue 1, 2, 5, 10, all the way up to 75-year forecasts of economic activity, government expenditure, unemployment rates, and so forth.

Reporters, pundits, and media personalities then report these forecasts with few qualifications about their future accuracy or inaccuracy as events unfold and new real-time data are released.

Any wonder that the federal government and most professional economists missed the Great Recession and financial crisis that erupted in 2008!  The forecasting community cannot get next month right, but have no problem issuing long-term projections.  Were John McEnroe a pundit, he would say "You cannot be serious!"

So please take every political candidate's statements on how their proposals will increase growth, reduce inequality, reduce deficits, improve middle-class wages, and so on with mountains of salt. Their promises are as accurate as next month's jobs report!

Friday, April 3, 2015

Governor Brown Signs Executive Order B-29-15 Announcing First-Ever California Mandatory State Water Reductions

On April 1 (No April Fool’s Joke), 2015, Governor Jerry Brown signed a seven-page Executive Order that imposed 25% mandatory water reduction in 2015 over 2013 usage for urban areas, commercial, industrial, and institutional properties (campuses, golf courses, cemeteries), along with other restrictions.  It is worthwhile to read the entire Executive Order.

Brown maintains that global warming is producing climate change, which can result in long-term drought.  So what took him so long to act?  Why did he wait four years until California was in a full-blown water crisis?  One or two more years of drought, which Brown acknowledges is a possibility, would reduce the lakes, reservoirs, and underground aquifers to catastrophically low levels.

We know the answer: Governor Brown is a hard-core environmentalist. Environmentalists have blocked all attempts to build new water storage facilities since the 1970s.

Governor Brown was careful to throw environmentalists under the bus only for a limited period of a year or so.  Nor did he address large-scale farming, which uses 80% of the state’s water.

Brown’s Executive Order contained 31 Directives.

To carry out directives 2-9, 11, 16-17, 20-23, and 25, Brown suspended regulations commencing with section 21,000 of the Public Resources Code until May 31, 2016.

To carry out directives 20-21, he suspended section 13247 and Chapter 3 of Part 3 of the Water Code.

In Directive 30 he suspended additional sections of the Government and Public Resources codes to accelerate the development and adoption of regulations to carry out provisions in his Order.

Australia was able to rationalize its use of water only after 11 years of drought.  It might take two more years of drought to rationalize the use of water in California, to the dismay of environmentalists.

Reality has a nasty way of impinging on ideology!

What is the OPTIMAL Marginal Tax Rate on the Top 1%?

Thomas Piketty and 250 of his French colleagues endorsed Francois Hollande for President of France in 2012 when Hollande promised to raise the top marginal tax rate (MTR) on the top 1% to 75%. Holland did just that in 2013.  But then he let the 75% rate expire at the end of 2014, restoring the previous 45% TMR (plus a 4% surcharge for those with taxable income over one million euros).

The 75% optimal TMR worked in theory, but not in practice.

For some economists, 75% is not high enough.  Dirk Krueger and Fabian Kindermann suggest that the optimal TMR on the 1% can be as high as 90%, with no deleterious effect on the economy. They contend that a TMR of 90% would enhance social insurance in the U.S. economy.  (They are not alone.)

The TMR hit 98% in postwar Britain and 91% in postwar U.S.  Wonder why those rates were not sustainable?

Friday, March 27, 2015

What's So Bad About 7% Growth in China?


At 7% annual growth, real output doubles in 10 years, quadruples in 20, and grows eight-fold in 30.

In marked contrast, it takes 36 years to double output at 2% growth.

At 3% growth, output doubles in 24 years, quadruples in 48, and increases eight-fold in 72.

U.S. annual growth is likely to remain in the 2-3% range.

Even if these respective rates vary somewhat, China will be the unquestioned dominant power in Asia and the largest economy in the world within a few decades.  The notion of the U.S. containing China or trying to remain the dominant military power in Asia is seriously misguided.

In this regard, why not outsource security for the Middle East and the Strait of Malacca to China, Japan, and Korea, three countries that rely on energy imports from the Middle East?  Let them pay for it.  Make them stakeholders in Middle East stability.

Saturday, March 7, 2015

Republican Senators Lee and Rubio Timidly Talk Tax Reform

In their Wall Street Journal article of March 3, 2015, Republican Senators Mike Lee and Marco Rubio throw their tax reform hat into the ring.

They are on the right track in proposing a lower corporate tax rate of 25 percent and unlimited first-year write-off (expensing) of all new investment.

But they timidly propose to replace the current seven personal income tax rates (10, 15, 25, 28, 33, 35, and 39.6 percent) with two of 15 and 35 percent.  President Reagan’s Tax Reform Act of 1986 replaced a bevy of marginal tax rates peaking at 50 percent with two rates of 15 and 28 percent.

After twenty-nine years the best these two pro-growth Republican senators can do is add seven percentage points on Reagan’s top marginal rate.   Even the Democrat Bradley-Gephardt plan of 1986, which proposed three rates of 14, 26, and 30 percent, was more audacious.  


Thursday, January 8, 2015

Water is California's Real Problem

California is in the midst of a four-year drought.  Despite the several days of heavy rain in mid-December 2014, rainfall and snow pack water content are way below normal.  As of January 6, 2015 (with no rain in the forecast for the next 10 days), the water content of the Sierra snow pack is at 43% of normal for this time of the year, and only 17% of the average for April 1.

Trees are beginning to die across the state and even revered redwoods are showing signs of illness.

Indeed, one of California's most famous theme songs California Here I Come will be giving way to the Cowboy ballad Cool Water.

Unlike oil and gas, there is no national market for water.  California's water supply is a mixture of federal, state, and private sources, some of which derives from out of state.  The politics of water is extremely partisan, with cities electing Democrats and farming areas Republicans.

The water bond approved by the state legislature in 2014 will have little impact on short-run water supplies.

If high pressure off the coast continues to block the moisture-laden winter jet stream this year and beyond, more of the state will revert to desert, fire danger will worsen, and both oaks and redwood will die in large numbers.

You can follow the situation on the first link above.