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Hendrickson's View

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Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

Green Fiascoes and Boondoggles

A barrage of news headlines on the Solyndra scandal continue to remind us that President Obama made green jobs one of his administration's priorities. Those headlines also reveal this initiative to have been a costly mistake.

The bankruptcy of Solyndra, the solar-panel manufacturer that has collapsed despite receiving half a billion dollars from the federal government, is only the tip of the iceberg. The Wall Street Journal recently reported that several other green companies that received generous federal aid are teetering on the brink.

Ener1, whose subsidiary EnerDel received a $118 million federal grant, lost $165 million in fiscal 2010 and has dim prospects. According to the Journal, Ener1 had "lost its bid to supply batteries to Fisker Automotive, a battery-powered car maker which received a $529 million U.S. taxpayer-backed federal loan guarantee in 2010," when "Fisker chose to buy its batteries from a company called A123 Systems, itself the recipient of a $249 million U.S. Department of Energy grant."

Great! First Team Obama extends taxpayer dollars to green companies, then it torpedoes them by giving larger grants to their competitors. Meanwhile, Fisker, itself a recipient of over a half-billion dollar handout from Uncle Sam, is making its cars in Finland.

Team Obama's record on creating green jobs is no more confidence inspiring than its record in mid-wifing a viable electric car industry.

A recent study by the Labor Department's Inspector General examined what became of $162.8 million of Obama stimulus money funneled to the Employment and Training Administration. Set up to "train and prepare individuals for careers in 'green jobs,'" the score is this: 53,000 individuals were trained, 8,035 got jobs, and only 1,033 trainees still held those jobs after six months.

There are at least four important reasons why we should stop funding "green" government programs:

First lesson: government-appointed experts are incompetent economic planners - a fact of life that any intelligent adult should know after the spectacular failure of central economic planning in the socialist experiments of the 20th century. No matter how brilliant and how well-intentioned government planners may be, they do not and cannot know what consumers want and how much they are willing to pay for it. Only free markets can solve this challenge. If electric cars are to be a viable industry, private companies will make them so.

Second lesson: The government's involvement in Solyndra raises troubling questions about possible corruption. While I think the Solyndra deal stinks to high heaven, I wonder whether any laws have been broken. Where is the dividing line between influence peddling, legitimate lobbying, political deal-making, and actual crime? Many farm-state Republicans have supported the uneconomical ethanol boondoggle for decades in exchange for generous support of their electoral campaigns, so the practice is bipartisan.

Third lesson: Government job programs are a blatant failure. They have never been economically beneficial. In the 1930s, Franklin Delano Roosevelt had the department of agriculture hire 100,000 Americans to monitor how much acreage American farmers were cultivating. These federal jobs produced no wealth. Their jobs made no more economic sense than paying people to dig holes and then fill them up.

Today's green workers are economically nonsensical, too. True, they sometimes produce something, but the economic value is invariably less than the amount of tax dollars needed to subsidize their job. In other words, federal jobs make us poorer.

Fourth lesson: Finally, we simply can't afford these green boondoggles. Uncle Sam's official debt is now $15 trillion, and when you include off-budget items and unfunded liabilities, the situation is far worse. Given this fiscal reality, it is the height of irresponsibility to throw taxpayer dollars at any special interest, and it is particularly egregious to subsidize enterprises that are plainly uneconomical.

I am not opposed to green industries. What we need is for the government to get out of the way and let green technologies prove themselves in the competitive marketplace. It's time for change and an end to economic foolishness. Let's get the burden of green boondoggles off the taxpayers' back.

Veterans: What Is Seen and What Is Not Seen

In economics, the first lesson I teach my pupils is the lesson of things that are seen and things that are not seen. Actions have some effects that are readily apparent and others are overlooked or not perceived.

It's the same with our military veterans. We see the obvious price they've paid - the time they spent far away from home and some of the physical injuries, such as lost limbs. What we don't see are their psychological wounds. Sadly, these are more numerous than physical injuries, and they often cause greater suffering.

It took me many years to understand this. The uncle who raised me was as tough and fearless as any man I've ever known, yet even he struggled with deeply disturbing memories from World War II more than half a century later.

He tried to keep those memories bottled up deep inside, but after a few stiff drinks at night, those memories would issue forth in long soliloquies. Many times the uncle I called "Pop" recounted an incident that happened on the aircraft carrier Essex. He was in charge of making the planes flightworthy. One day, a fighter plane returned from its mission intact, except that when Pop checked the belly gunner's turret, he encountered a gory sight: the belly gunner's head had been blown off and the turret was a bloody mess.

As soon as he learned of the situation, the captain of the Essex wanted to know if the aircraft could fly again. Pop sent a message back via the ship's chaplain: Yes, the plane could fly, but all that blood would smell horribly in the tropical heat. Pop recommended confirming the identity of the dead man, administering last rites, then burying the man at sea in the plane in which he had given his life for his country. The captain signaled "thumbs-up" from the bridge, and so the plane became a coffin that was pushed off the flight deck into the Pacific.

Pop had seen much death and destruction in the war, but he couldn't shake the memory of this particularly vivid incident. Many times I had sat silently while Pop retold the story, doing my best to be a supportive listener. One night, while listening to this story for the umpteenth time, it dawned on me that Pop was haunted by that horrific image, and it seemed right to try to ease his torment. I decided to reason with him the way he had reasoned with me when I was growing up. "Pop," I said, " that belly gunner was no more dead than all the other soldiers and sailors killed in the war, and his death may have been more merciful than most, because it happened before he knew what hit him."

My statements hit home. Pop snapped out of his dreamy, far off, reverie. His eyes took on a clear, focused look. "I suppose that's so," he acknowledged, and he then turned the conversation to less intense subjects. I sat with Pop during many more nights when he drank and reminisced before his passing a year later. Never again did he tell that story. That nightmarish memory had ceased to haunt him. He had finally processed it and moved on.

Every veteran close to me has wrestled with disturbing memories to varying degrees. In some cases, it took years, even decades, before they were ready or able to talk about the traumatic events that have haunted them.

Our veterans have far more scars than meet the eye. For most of them, thank God, the love of their families, their many happy memories, and their personal courage to push ahead with satisfying and productive lives enable them to cope with the ugly memories of war.

How can we help them? That isn't an easy question, but as we pause to recognize and honor their service to our country on Veterans Day, let us resolve to do what we can. Let us be steadfastly supportive friends and family members.

If our veterans need to talk, let us be patient and compassionate listeners.

If they prefer not to talk about their military service and are getting on with their lives, then let us respect their wishes and let sleeping dogs lie.

If their military memories continue to hurt them today, perhaps we need to help them find professional help.

If nothing else, let us look for opportunities to express our gratitude for their sacrifices and pray that each precious one of them may find peace from haunting memories.

Looking Ahead to 2012, 2013, and 2014

Whoever takes the oath of office as President of the United States in January of 2013 will inherit an economy facing multiple challenges:

Undoubtedly, still-escalating federal spending will have the government bumping up against the debt ceiling again. By then, total federal debt will be larger than our GDP.

Unemployment is likely to remain high.

The supply and reliability of our power-generating infrastructure will be stressed and at risk due to President Obama's anti-energy policies.

Social Security and Medicare will still need to be reformed significantly to address long-term fiscal imbalances.

And the economy will encounter new headwinds as the landmines of tax increases with which Obama has salted the economic landscape are detonated. These include new taxes for Obamacare, the scheduled expiration of the Bush tax cuts, and the end of Obama's temporary reduction in Social Security withholding.

Obama has shown no indication of modifying his policies or agenda. Presumably, any of the Republican candidates would favor change on these issues (although perhaps not on Social Security and Medicare), but would he or she actually be able to solve these problems, even if there were a veto-proof Republican Congress?

The big political question for election year 2012 is: How much change would Republicans want? Would they downsize government as much as Obama upsized it? Will Republicans nominate a safe, moderate candidate (think: Ford, Bush, and Dole) - a technocratic tinkerer who accepts the entrenched paradigm of Big Government, and seeks to manage Leviathan better than Democrats would? Or will they opt for an unabashed conservative, a major reformer with a radical vision for smaller government?

That question wasn't even conceivable a year ago, but the tectonic plates in the American political landscape may be starting to shift. Whiffs of radical reform are in the air.

Herman Cain, who favors a three-step plan to replace the income tax with a national sales tax and the privatization of Social Security, has risen in the polls since his impressive victory in the Sept. 24 Florida straw poll.

On Sept. 27, Newt Gingrich unveiled his "21st Century Contract With America," proposing to replace such venerable bureaucracies as the National Labor Relations Board and the Environmental Protection Agency. In doing so, Gingrich dared to challenge two of the most powerful Democratic special interest groups in America, environmentalists and labor unions (the strangest political bedfellows in our country, since hardcore greens would eliminate jobs in industry if they could).

It is possible that the bold proposals of Cain and Gingrich are just so much noise - red meat offered by dark horse candidates designed to excite passionate conservatives, but that are anathema to Republicans who believe that a more centrist nominee would be more electable?

Another possibility is that a majority of Republicans will regard the 2012 election as an existential crossroad for our country, a last chance to change direction before we end up like Greece - financially bankrupt, economically moribund, and politically convulsed. In this scenario, just as the Democrats in 2008 nominated a man of the left, Obama, rather than a more centrist candidate, so the GOP will nominate an anti-Obama, a true-blue conservative as committed to a radical swing to the right, just as Obama pushed a radical swing to the left.

If the political pendulum swings far enough to the right to produce a 2012 conservative electoral landslide, and then Republicans follow through with bold cuts in federal spending and power, the years 2013 and 2014 will be crucial. If conservative policies revive the economy quickly, then Republicans could hold on to their 2012 gains in the 2014 mid-term elections. If not, or if they step on too many toes, then there could be an anti-Republican backlash for moving too far to the right, just as voters punished Democrats in the 2010 elections for moving too far to the left.

If a sizable Republican majority were elected in 2012, would they "roll the dice" and risk political suicide by instituting major reforms? I imagine there is some serious soul-searching going on now. I wonder how many of them are grappling with the dilemma that must confront every office-seeker in a democratic electoral system: Should I do what will get me elected or re-elected, even if I know that the policies I support will weaken our country, or should I vote for what I know will help the country, even if it costs me my political career?

These next few years will be fascinating.

Short-Lived Euphoria in Europe

Thursday, Oct. 27, 2011, was a giddy day for European politicians and global investors. European Union officials announced a plan for addressing the EU's worst financial problems. There would be a partial write-down of Greek sovereign debt - a 50 percent haircut for private bondholders, but no haircut for governmental creditors (the political class looks after its own). In addition, EU officials unveiled a one-trillion euro (approximately $1.4 trillion) bailout fund purportedly to recapitalize European banks and insure against sovereign defaults.

Stock markets on both sides of the Atlantic soared on this news. Euphoria reigned - for a few days, that is. Just three trading days later, markets gave up all of the previous Thursday's gains and pessimism returned.

Two events in particular have precipitated this manic mood shift: Prime Minister George Papandreou announced that he will submit the EU bailout plan to a national referendum, and the financial firm MF Global Holdings, which had placed a heavy bet on European government bonds, has declared bankruptcy.

Even if these two Halloween surprises hadn't spooked the markets, the viability of the EU bailout plan was in doubt anyhow.

Europe's financial problems are immense and intractable. Greece is the focus of attention, but when you realize that Greece's national debt is around 350 billion euros - its entire GDP is only about 225 billion euros, which shows how hopelessly broke the Greek government is - and the announced bailout fund was for one trillion euros, you can see that most of the bailout fund isn't for Greece.

Spain and Italy combined are almost three trillion euros in debt and run chronic budget deficits. Significantly, since the bailout plan was announced, interest rates on sovereign Spanish and Italian debt have risen, indicating widespread skepticism that the bailout fund (if it materializes) would buy sufficient time for those governments to get their financial houses in order.

While detailed specifics about the bailout plan are vague, cautious skepticism is prudent - for two major reasons:

First, where will the vast sum of one trillion euros of bailout money come from? Certainly, no European government has that kind of money set aside for the proverbial rainy day. Even Germany, the undisputed economic leader of Europe, has a national debt of 70 percent of its GDP and is limping along with a one percent growth rate.

Bailout funds would have to come from a combination of creative forms of monetary inflation and clever financial and accounting engineering, much of it using more of the leveraged gimmicks that already have made both Europe's and the United States' financial systems so stressed and vulnerable.

Second, how realistic is it to expect all EU member states to finally start to abide by the terms of the Maastricht Treaty that they signed - the one in which they solemnly promised to keep sovereign debt and deficits far below current levels? How many of the electorates in these democracies will support government "austerity plans" - a significant reduction in the government handouts to which they have grown so addicted?

The modern welfare state is broke. As Herman Van Rompuy, the president of the European Council, has stated, "We can't finance our social model anymore." Government spending will have to be trimmed whether Europeans want it or not, but don't expect European voters to admit the inescapable economic facts and vote for belt-tightening.

It is because voters don't want to surrender government benefits that Papandreou's announcement of a referendum in Greece caused consternation and displeasure among the EU's political elite. The irony here is rich: How dare the leader of a democracy leave such an important decision to the people!

Personally, I think Papandreou did what he had to do. If he were to try to cram austerity down the throat of his compatriots, he would appear to be siding with foreign elites against his own people. The present simmering rebellion in Greece would increase, giving way to social chaos and the fall of Papandreou's government, thereby triggering the sovereign default that Europe's leaders understandably want to avoid.

If Greeks vote against the terms of the bailout, Greece will default. If they approve the plan, then a Greek sovereign default may be delayed (not eliminated - Greece is too far gone to rescue). Even if we remove Greece from the equation entirely, events in Spain, Italy, Portugal or Belgium might trigger the dreaded chain reaction of bank and sovereign bankruptcies.

Decades of government intervention into economic activity have produced economic distortions, sluggish growth, an unsupportable debt burden, and a rotten financial structure ready to collapse of its own dead weight. In spite of that record, most Europeans want more government. That's their choice. Like it or not, sooner or later, we reap what we sow.

We've Been ZIRPed

It isn't easy to earn interest income these days. Interest rates on government T-bills, banks' savings accounts, and certificates of deposit are microscopic. You can blame our government and central bank. They have "ZIRPed" millions of American savers. Here are the details:

According to the U.S. Treasury Department, the average interest rate paid on federal debt, as of July, was just under 2.4 percent, implying an annual interest expense on $14.5 trillion of debt of nearly $350 billion. (Net debt, subtracting intra-governmental debt is lower; actual debt, including off-budget items, is higher.) If the average interest rate rose to 5 percent, the annual debt burden would rise correspondingly to well over $700 billion and consume approximately one-third of total federal revenues.

At some point, higher interest rates would consume such a large portion of federal revenues that only massive dollar creation by the Federal Reserve could provide funding for government's myriad programs. Washington simply cannot afford interest rates to rise, and therefore, the Fed will keep them abnormally low for as long as possible. In essence, the Fed has declared an end to a free market in interest rates.

The market price of interest rises when demand increases relative to supply and falls when supply increases relative to demand. Today's record-low interest rates imply that the supply of money saved, i.e., capital, is abundant relative to the demand for capital. It isn't.

Today's low interest rates are not the result of superabundant capital, but are the result of massive intervention by the Federal Reserve System. In response to the financial panic in 2008, the Fed adopted what is known as ZIRP - a "zero interest rate policy." This August, Fed Chairman Ben Bernanke announced his intention to maintain this policy for two more years. Doubling down on this engineered low-interest-rate policy, on September 21 the Fed announced "Operation Twist" - its plan to force down long-term interest rates even more.

Without Fed intervention, the supply of savings - genuine capital - would not be sufficient to finance and refinance all of the world's debt. Interest rates are this low only because the Fed has been using its extraordinary powers to boost the supply of capital with "fiat capital" - money that nobody has earned and saved, but that the Fed conjures up ex nihilo.

As with the supply of capital, Federal Reserve interventions, along with various government interventions, have manipulated the demand for capital. If the U.S. Treasury had to compete with vigorous private demand for capital, interest rates would rise, so it has been necessary to squelch private demand.

Government and its central bank have suppressed demand for capital in several ways:

First, the torrent of anti-wealth policies unleashed by the Obama administration have produced the "turtle phenomenon" - many businesses have gone into shells, postponing plans to open or expand until the cloud of uncertainty and fear of arbitrary wealth-destroying policies blow over.

Second, the Fed has been paying interest (albeit a modest .25 percent) on banks' excess reserves, and that has reduced the incentive for banks to lend those funds.

Third, there is abundant anecdotal evidence that banks have been rationing credit so severely that even low-risk customers often are denied loans.

American savers are taking it on the chin. With interest rates on Treasury debt being ultra-low, when you factor in inflation and taxes, savers are paying the Treasury to hold their money instead of earning a positive and market rate of interest. By creating artificially low interest rates, the federal government benefits by making artificially low interest payments on its massive amount of debt. In effect, ZIRP is bailing out our bankrupt government at savers' expense. This is one way that wealth is being "spread around" in the age of Obama.

By ZIRPing us unrelentingly, the Fed is proving that it is no friend of the people. To paraphrase the Gettysburg Address, the Fed is a tool "of the [government], by the [government], for the [government]." One is tempted to add: [May it soon] "perish from the earth." *

Read 3912 times Last modified on Saturday, 05 December 2015 10:47
Mark Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Value, and Forbes.com.

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