Obama's Fairy Dust

John Tamny, 06.21.09, 12:01 AM EDT

Profit and loss are the most effective regulators.

In a major speech last week in which he rolled out his vision for financial regulatory reform, President Barack Obama said he has "always been a strong believer in the power of free markets." Nice rhetoric for sure, particularly given a series of proposals meant to hamstring natural market activity while surely driving other forms of finance overseas. [More]

It's the Wealth Stupid

Finding the root cause of the economic meltdown 

You have to wonder why a majority still oppose the governments effort to  'fix' the ailing sectors of our economy, and why their representatives would go ahead and bail these sectors out anyway.  Opposition exists mostly because the taxpayers don't want to have their money used to bail out irresponsible lenders or greedy investors.  Possibly they also instinctively realize the futility of salving the symptom without excising the disease.  What's the disease?

The graph shows overall growth in GDP, but contraction in manufacturing (the private goods producing sector.) We are producing less. Adam Smith in 'The wealth of Nations' wrote that national wealth was comprised manufacturing and agricultural output. The addition of manufacturing was novel.  Today we add sectors of economic activity  to GDP that don't really increase wealth.  We are becoming less wealthy. The blue bar (production) in a healthy economy (in my opinion) should predominate, as the red bar (services) consist of non-exportable things like Pizza delivery (hardly the thing to create wealth.) The problem is the loss of manufacturing to foreign industries. The main  reason for this is that domestic production can't compete with foreign manufacturers. Protectionism is not the solution (though changes must be made to some trade agreements to make things fair.)  The real solution is to create a business climate in the USA where US manufacturers can thrive. The real drop in 'private goods producing' correlates to the arrival of the Democrats majority in congress. This is not surprising as Democrat regulation and Tax policy has been a major cause of the loss in this sector. Improvement in this sector requires less regulation (replace with better, more focused, and intelligent regulation.) It also requires a lowering of corporate tax rates.

A 2004 report from the Council of Economic Advisors: Manufacturing as percentage of GDP declining.

The report, though painting a rosier picture than reality dictates, has a number of good recommendations.

As of 2004 Manufacturing was the same percentage of GDP as government revenue and expenditures. 12.7 %.

Manufacturing Share Of GDP 1998-2003
                                                               Percentage 
                                                               point 
          Industry                                     2003    change 
          
          Manufacturing                                 12.7   -2.7 
          Wholesale trade                                5.9   -0.4 
          Transportation and warehousing                 2.8   -0.3 
          Agriculture, forestry, fishing, and hunting    1.0   -0.2 
          Utilities                                      1.9   -0.1 
          Administrative, waste management services      2.8   -0.1 
          Accommodation and food services                2.6   -0.1 
          Other services, except government              2.4    0.0 
          Construction                                   4.4    0.1 
          Educational services                           0.9    0.1 
          Arts, entertainment, and recreation            1.0    0.1 
          Management of companies and enterprises        2.0    0.2 
          Government                                    12.7    0.2 
          Mining                                         1.1    0.3 
          Retail trade                                   7.2    0.4 
          Professional, scientific, and technical 
          services                                       6.9    0.4 
          Information                                    4.9    0.5 
          Finance and insurance                          7.9    0.5 
          Real estate and rental and leasing            12.4    0.5 
          Health care and social assistance              6.8    0.7 
          Total Gross Domestic Product**               100.0    0.0 

**Does not add exactly due to rounding.  
Source: U.S. Department of Commerce, Bureau of Economic Analysis 

This article was from 2004.  The last column shows the trends.  The trends indicate government is now the largest part of the US economy.  (Why it is even included as part of GDP is a mystery to me.  Government never produces real value or wealth - but only inefficiently moves wealth around, or as Barak would say: 'spread[s] the wealth around'.)  If you look at the other contributors , the chart answers a question I hear often: 'what is replacing manufacturing since our economy is growing?'

The biggest non-government sector would be real estate.  Our  economy has been 'growing' on the run up in real estate values.  This - like government - is a false indicator of real wealth.  We have been living as a country on the run up in real estate values.  Fannie Mae and Freddie Mac contributed to this fantasy in home valuation.  The truth about our impoverished condition became clear once the real estate bubble broke.

The economy is ailing chiefly because of Democrat policies that have made the US a caustic environment in which to run a business.  The Democrat spawned sub-prime mortgage mess just made things worse.  Nancy Pelosi is disingenuous when she claims this is all the fault of the 'failed policies ' of the Bush administration.  Democrats mustn't be rewarded for this  any more than should the board members of Lehman Brothers.  Barak Obama's policies will only accelerate the loss of business, loss of wealth, and loss of jobs. They will also lead the US Government to bankruptcy. John McCain's policies were more likely to set the US economy in the right direction.  As bad as it is - let's not make it worse.

 

President Bush is responsible.  Along with the tax cuts, which have increased revenue, he should have vetoed spending bills.  The republican majority in congress until 2006 was also responsible, because they allowed these bills to come to the presidents desk.  They were spending more than the democrats, largely in a crass maneuver to stay in power.  This obviously backfired.  Now regardless of what Ms. Pelosi says, the democrats for the last two years are responsible.  It was on their watch that the meltdown occurred.  As has been documented and reported extensively, they encouraged the sub-prime mortgages and resisted regulation proposed by Bush and the republicans.  Here's the worst part.  As the losers in the last couple election cycles, they have been the voice of negitivity for several years.  They have been critical of every decision and move the president has made and framed them all as bad.  They did this on the war on terror and on the economy.  The economy is driven on public confidence.  Just look at senator Schumer:  From the office of thrift supervision: "The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts."

"This institution failed today due to a liquidity crisis," OTS Director John Reich said. "Although this institution was already in distress, I am troubled by any interference in the regulatory process.""

AiG. 

Government intervention in the private sector should be forbidden.  Here is an article from the Washington Post that proves it.

Effectiveness of AIG's $143 Billion Rescue Questioned

By Carol D. Leonnig
Washington Post Staff Writer
Monday, November 3, 2008; Page A18

A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant American International Group may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing.

The Treasury Department leapt to keep AIG from going bankrupt on Sept. 16, and in the past seven weeks, AIG has drawn down $90 billion in federal bailout loans. But some key AIG players argue that bankruptcy would have offered more structure and greater protections during a time of intense market volatility.

AIG declined to comment on the matter...

Niall Ferguson: Keynes can't help us now

Letter To GM  Employees / from Gregory Knox

Letter To General Motors 
Abridged letter from Troy Clarke, President of General Motors
  followed by a response from Gregory Knox:


Dear Employee,

Next week, Congress and the current Administration will determine whether to provide immediate support to the domestic auto industry to help it through one of the most difficult economic times in our nation's history. Your elected officials must hear from all of us now on why this support is critical to our continuing the progress we began prior to the global financial crisis.....................As an employee, you have a lot at stake and continue to be one of our most effective and passionate voices. I know GM can count on you to have your voice heard.

Thank you for your urgent action and ongoing support.

Troy Clarke
President
General Motors North America

---

From Gregory Knox,

In response to your request to call legislators and ask for a bailout for the United States automakers please consider the following, and please also pass this onto Troy Clark, the president of General Motors North America for me.

You are both infected with the same entitlement mentality that has bred like cancerous germs in UAW halls for the last countless decades, and whose plague is now sweeping the nation, awaiting our new "messiah" to wave his magical wand and make all our problems go away, while at the same time allowing our once great nation to keep "living the dream".

The dream is over!

The dream that we can ignore the consumer for years while management myopically focuses on its personal rewards packages at the same time that our factories have been filled with the worlds most overpaid, arrogant, ignorant and laziest entitlement minded "laborers" without paying the price for these atrocities and that still the masses will line up to buy our products

Don't tell me I'm wrong. Don't accuse me of not knowing of what I speak. I have called on Ford, GM, Chrysler, TRW, Delphi, Kelsey Hayes, American Axle and countless other automotive OEM's and Tier ones for 3 decades now throughout the Midwest and what I've seen over the years in these union shops can only be described as disgusting.

Mr Clark, the president of General Motors, states:

There is widespread sentiment in this country, our government and especially in the media that the current crisis is completely the result of bad management. It is not.

You're right, it's not JUST management, how about the electricians who walk around the plants like lords in feudal times, making people wait on them for countless hours while they drag ass so they can come in on the weekend and make double and triple time for a job they easily could have done within their normal 40 hour week

How about the line workers who threaten newbies with all kinds of scare tactics for putting out too many parts on a shift and for being too productive (mustn't expose the lazy bums who have been getting overpaid for decades for their horrific underproduction, must we?!?) Do you really not know about this stuff?!?

How about this great sentiment abridged from Mr. Clarke's sad plea:

over the last few years we have closed the quality and efficiency gaps with our competitors.

What the hell has Detroit been doing for the last 40 years?!?

Did we really JUST wake up to the gaps in quality and efficiency between us and them?

The K car vs. the Accord?

The Pinto vs. the Civic?!?

Do I need to go on?

We are living through the inevitable outcome of the actions of the United States auto industry for decades.

Time to pay for your sins, Detroit .

I attended an economic summit last week where a brilliant economist, Alan Beaulieu surprised the crowd when he said he would not have given the banks a penny of "bailout money". Yes, he said, this would cause short term problems, but despite what people like George Bush and Troy Clark would have us believe, the sun would in fact rise the next day and something else would happen. Where there had been greedy and sloppy banks, new efficient ones would pop up. That is how a free market system works. It does work if we would let it work!

But for some reason we are now deciding that the rest of the world is right and that capitalism doesn't work; that we need the government to step in and "save us". Save us, hell we're nationalizing and unfortunately too many of this once fine nation's citizens don't even have a clue that this is what's really happening but they sure can tell you the stats on their favorite sports teams yeah THAT'S important.

Does it occur to ANYONE that the "competition" has been producing vehicles, EXTREMELY PROFITABLY, for decades now in this country?...

How can that be???

Let's see - -

Fuel efficient -

Listening to customers -

Investing in the proper tooling and automation for the long haul -

Not being too complacent or arrogant to listen to Dr W Edwards Deming 4 decades ago -

Ever increased productivity through quality, lean and six sigma plans -

Treating vendors like strategic partners, rather than like "the enemy" -

Efficient front and back offices -

Non union environment -

Again, I could go on and on, but I really wouldn't be telling anyone anything they really don't already know in their hearts

I have six children, so I am not unfamiliar with the concept of wanting someone to bail you out of a mess that you have gotten yourself into. My children do this on a weekly, if not daily basis, as I did at their age. I do for them what my parents did for me (one of their greatest gifts, by the way). I make them stand on their own two feet and accept the consequences of their actions and work them through.

Radical concept, huh?

Am I there for them in the wings? Of course but only until such time as they need to be fully on their own as adults

I don't want to oversimplify a complex situation, but there certainly are unmistakable parallels here between the proper role of parenting and government.

Detroit and the United States need to pay for their sins.

Bad news people, it's coming whether we like it or not.

The newly elected Messiah really doesn't have a magic wand big enough to "make it all go away" I laughed as I heard Obama "reeling it back in" almost immediately after the vote count was tallied "we might not do it in a year or in four"! Where was that kind of talk when he was RUNNING for the office

Stop trying to put off the inevitable!

That house in Florida really isn't worth $750,000!

People who jump across a border really don't deserve free health care benefits!

That job driving that forklift for the big 3 really isn't worth $85,000 a year!

That couple whose combined income is less than $50,000 really shouldn't be living in that $485,000 home!

Let the market correct itself people, it will. Yes it will be painful, but it's gonna be painful either way, and the bright side of my proposal is that on the other side of it is a nation that appreciates what is has and doesn't live beyond its means and gets back to basics and redevelops the work ethic that made it the greatest nation in the history of the world and probably turns back to God.

Sorry, don't cut my head off. I'm just the messenger sharing with you the "bad news"

Gregory J Knox
President
Knox Machinery, Inc.
Franklin, Ohio 45005