Mish's Global Economic Trend Analysis

Oklahoma Repeals Collective Bargaining Law; Economic Dunces in Enid
Birth and Death of the Celtic Tiger: Video on Ireland Bailout
It's Different in China and Here's Why; Is the Yuan Undervalued?
Holding Congress Accountable; Interest on National Debt is Biggest Projected Problem, Not Healthcare

Oklahoma Repeals Collective Bargaining Law; Economic Dunces in Enid

Posted: 19 Apr 2011 09:01 PM PDT

In yet another welcome display of common sense from state legislators, Oklahoma Senate approves collective bargaining repeal. Governor Mary Fallin is expected to sign the measure.

The Oklahoma Senate voted today to repeal a state law that grants collective bargaining rights to city employees in Oklahoma's largest cities.

House Bill 1593 passed 29-19 with entirely Republican support and now heads to Republican Gov. Mary Fallin.

The bill would repeal a 2004 law that requires cities with populations of more than 35,000 to grant collective bargaining rights to nonuniformed city workers.

The repeal would most directly affect local chapters of the American Federation of State, County and Municipal Employees, which in Oklahoma consist mostly of city road and utility workers.

Sen. Cliff Aldridge, R-Midwest City, said the bill is good policy because it lets local officials decide whether to negotiate with labor unions.

Sen. Andrew Rice, D-Oklahoma City, criticized Republicans for failing to provide specific proof showing why repealing the law would be a good idea.

"There is no good reason for this," Rice said. "We're really sending a nasty message to the people who do work in our communities."

Union Rules Make Us All Slaves

Sen. Andrew Rice is a complete fool or bought and paid by public unions, most likely both.

Of course there is a good reason to end collective bargaining. Cities should strive to provide the most services for the least cost, not the least services for the most costs.

The goal of public unions is to provide the fewest services for the most amount. Thus public unions are incompatible with public service.

Moreover, and I will keep mentioning this point every time paid fools like Sen. Andrew Rice open their mouths: union rules make us all slaves.

I will hammer the slavery point home until it sinks in. If you have not yet done so, please read ....

Paul Krugman, Stephen Colbert, Bill Maher, others, Ignore Extortion, Bribery, Coercion, and Slavery; No One Should Own You!

Collective Bargaining neither a Privilege nor a Right

Economic Dunces in Enid

According to the article, Enid, Oklahoma population 49,000, Oklahoma's, ninth largest city, "will continue bargaining with employees even if the law is repealed."

Collective bargaining jacks ups costs and that means higher taxes for absolutely no possible added benefit, and most likely negative benefit. Thus, regardless of where you live, you should vow to remove from office out any fools taking such a stance.

Click on the preceding link, or phone the city manager at 580-616-72 and let the officials know what you think. You can also Email Mayor John Criner as well.

If you do the latter, please send him a link to this blog with your comments.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Birth and Death of the Celtic Tiger: Video on Ireland Bailout

Posted: 19 Apr 2011 02:26 PM PDT

Inquiring minds are watching an excellent exposé by Max Keiser on how the bad debts of the Irish banks were transferred to the balance sheets of Irish taxpayers.

Hot Spots with Max Keiser - Ireland Part 1

Link if above video does not play: Ireland Hot Spots 1

Hot Spots with Max Keiser - Ireland Part 2

Max Keiser: "The people of Ireland have been carpet-bombed with debt. An IMF loan has been forced on them to pay off the government debt forced on the to pay off bankers' debt. Most of the bankers have fled the country but their bad debts continue to explode like financial roadside bombs across Ireland."

"The IMF is raising money to do what could be called a hostile raid of Ireland. They are putting up Ireland's own assets including the national electric company as collateral for the money to do the hostile raid to pay off banks that made tragically poor investment decisions."

One interviewee said, "We are borrowing from tomorrow to pay for yesterday, forgetting about today".

The key question is: How long will the citizens of Ireland put up with this criminal behavior?

For more videos or to leave a comment for Max, please see Hotspots with Max Keiser: Ireland

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

It's Different in China and Here's Why; Is the Yuan Undervalued?

Posted: 19 Apr 2011 11:49 AM PDT

Most of you know I loathe "It's Different Here" type of arguments.

However, in a recent newsletter, Michael Pettis of China Financial Markets makes precisely that case regarding interest rate hikes and the effect on the savings' rate in China.

Pettis writes ...

Not surprisingly, many analysts and journalists reported the interest-rate hike as a way of combating inflation by encouraging Chinese households to increase their savings and so reduce their consumption. As the New York Times puts it, "Raising interest rates should encourage depositors to hold more money in their accounts." As I have written before, however, I suspect that this view reflects a very US-centric view of how financial systems translate changes in interest rates into changes in savings rates (via changes in household wealth).

In China this may be getting the reality backwards. After all, if high interest rates encourage savings, and low interest rates encourage consumption, it is hard to understand why China, with its incredibly low real deposit rates (in fact they are seriously negative, and have been for much of the past decade), has such a high household savings rate, not to mention, more generally, why other Asian countries with very low real interest rates have also had high savings.

I would suggest that the reason is pretty straightforward. Negative real deposit rates actually reduce household wealth in China by lowering the value of savings. Few households in China borrow, and most savings is in the form of deposits, not, as in the US, in the form of assets whose values typically decline with rising interest rates. Since nearly everyone in the world responds to lower income or wealth by cutting back on consumption, Chinese households actually increase their savings when the deposit rates decline in real terms.

So does that mean that the PBoC's raising interest rates will cause an increase in inflationary pressures? No, because interest rates have only been rising nominally.

China's "One Child Policy" and the Savings' Rate

I asked my friend "HB" on the Acting Man Austrian economics discussion blog what he thought of Pettis' idea. "HB" writes ...

I think Pettis may well be right. Think about it this way: China doesn't have a very well developed welfare state. Moreover, China's "one child policy" means that parents cannot rely on children supporting them in their old age. Therefore, a high savings rate is the natural outcome, primarily to provide for an extremely uncertain future. Thus, lowering interest rates on savings is a recipe to reduce consumption further.

Compounding the problem, China's negative interest rate (in real terms) has fueled a malinvestment boom that is truly of historic proportions.

Malinvestment Boom

Most of the Western world looks on China's growth with a sense of wonder, awe, and even envy. However, Austrian-minded economists and writers see China's growth differently. We see the boom in China as malinvestment, much like the US housing bubble.

Growth for growth's sake (or to keep the population employed and prevent uprisings), eventually hits a brick wall. Sooner or later there comes a point where building houses, airports, malls, and cities results in a rapid expansion of credit at a cost that vastly exceeds any conceivable benefit.

In China, that point has long been reached. Shopping centers, commercial real estate, apartments, and even entire cities sit empty. Yet the building continues as credit expands. The cost is spiraling inflation and debts that cannot and will not be paid back.

There is early evidence China's growth is rapidly slowing already. Please see Hidden Losses and Little Reform; China May Be Slowing More Than You Think

Is the Yuan Undervalued?

Eventually China's property bubble will crash and China's entire infrastructure boom along with it. When that happens, it will take a monumental effort to recapitalize China's banks.

In light of that last statement, the widespread belief that the Yuan is massively undervalued is at best questionable.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Holding Congress Accountable; Interest on National Debt is Biggest Projected Problem, Not Healthcare

Posted: 19 Apr 2011 03:13 AM PDT

My biggest complaints against Obama's budget plan and the budget plan of Paul Ryan are

Neither plan balances the budget soon enough
Both ignore interest on the national debt

Practically Speaking, Neither Plan Can Pass

Balancing the budget 20 or 30 years from now is not acceptable. It is hard to enough to plan 5 years ahead, and it's downright silly to think one can balance a budget 20-30 years ahead.

Obama's plan is far worse than Ryan's, but practically speaking, neither works. Moreover, politically speaking, neither can pass.

Need to Set Goals

To accomplish anything we need to set a goal. I proposed such a goal in Simple Proposal: Balance the budget by 2022 come hell or high water

Holding Someone Accountable

One problem with every proposal to date, including mine, is that no one is accountable. By that I mean there is no enforcement mechanism.

Realistically, there never can be a guaranteed enforcement mechanism because any agreements or legislation passed by this Congress does can be undone by the next Congress.

However, if both sides share the pain equally in any resolution, it will be much harder for one side to game the system or refuse to cooperate.

Budget Projections From Peterson-Pew Commission

To rectify the shortcoming I mentioned above, the Peterson-Pew Commission on Budget Reform has proposed a trigger enforcement mechanisms to Get Back in the Black.

I do not agree with all of their proposals. Indeed their target of cutting $4 trillion over 10 years is certainly wimpy. It will not balance the budget soon enough, if indeed ever.

Nonetheless, this budget projection in their 48 page PDF caught my eye.

Spending and Revenues 1980-2080

click on chart for sharper image

I sent an email to the Peterson-Pew Commission because I would like to know just what interest rates they have factored in to create that chart.

Whatever the rates are, note that interest on the national debt will eventually become the biggest fiscal issue.

Projection Silliness

Mathematically speaking, if projecting 30 years ahead is silliness, what does that say about projecting 70 years ahead?

Reflect back to 2000. What happened to the budget surplus that was supposed to last a decade? Greenspan had the audacity to agree with that projection. Did the surplus last six months or was it imaginary to begin with? I vote the latter.

Looking ahead, interest on the national debt will continue to rise until debt levels shrink.

Fed's Exit Plan in Question

How likely is it that interest rates will drop? Short-term rates can't. Unfortunately, the Fed is not locking in low long-term rates now. Instead, the Fed is buying treasuries rather than selling them in a foolish attempt to force down rates. That plan has failed, yet the Fed persists.

Supposedly the Fed has an "exit plan", but whatever that plan is, long-term rates are likely to rise. When they rise, so will interest on the national debt.

Failed Budget Process

From the Peterson-Pew report ....

A budget process can only be judged by its results. The current process has allowed the federal government to commit to spending far more than the revenues it will collect. The budget is deep in the red, and getting it back into the black cannot be accomplished without major actions. Although the heart of the problem is the lack of political will to make responsible policy choices, the broken process contributes significantly to the nation's dangerous fiscal situation.

Today, budgets are created annually, without any kind of fiscal target guiding the process. There is no single identifiable "budget," and the President and congressional committees operate on separate tracks with no shared objective: the President makes a proposal; and the House and Senate Budget Committees may, or may not, develop their own budget resolutions, which, however, lack the force of law. Increasingly, there is no comprehensive action on a budget at all: rather, the government operates on a series of short-term appropriations or continuing resolutions, followed by huge omnibus spending bills, with occasional piecemeal enactment of changes in other spending or tax laws. In practice, the bulk of the government's spending and revenue occurs on autopilot, without annual review or
any constraint on growth.

The current budget framework is too short-sighted and tends to focus primarily on the upcoming year. The result is that lawmakers routinely continue programs that could not withstand rigorous evaluation of their costs and benefits. The short-term appeal of the government's spending more than the people are willing to pay has contributed to deficit spending—even during periods of economic growth, when surpluses should be the norm. Erosion of the commitment to balanced budgets has produced an environment in which it has become acceptable to borrow in order to spend more. While borrowing is not always bad—it can be useful in a recession—sustained periods of borrowing damage the economy and eventually lower the nation's living standards.

Current unsustainable policies result in large part from a process that does not require policymakers to lay out a fiscal plan with feasible limits or to consider the long-term implications of their decisions.

No Plan Can Work When the Process is Broken

Can anyone from either party dispute the notion the budget process is broken? I think not.

The question then is what to do about it. Unfortunately, the Pew Commission ignores the fact that the lobbyists write our legislation (GE's corporate tax rate is proof enough). However, the report does have some ideas with potential to rectify some of the flawed process.

Establish Strong and Comprehensive Enforcement Procedures

From page 19 of the report ....

Past automatic triggers have failed in part because so many programs were exempt from the trigger and it was so easy to bypass the restrictions. The Commission recommends that its proposed triggers apply to the broadest base possible, including all discretionary and mandatory programs and all taxes. For revenues, the Commission proposes a broad-based surtax; for spending, all programs—both mandatory and discretionary—would have across the board reductions. The debt trigger would be 50 percent tax increases and 50 percent spending cuts, with credit given for policies enacted that year on either side of the budget. A broad base would be more effective in keeping the plan on track because it would raise the political consequences for policymakers of failing to meet targets. It would thereby create incentives for Congress and the President to craft their own fiscal policies, rather than relying on formulaic reductions to meet the debt targets.

History of Budget Trigger Failures

Ignoring details regarding proposed cuts, a target of $4 trillion in cuts spread out over 10 years is simply not deep enough. It would not balance the budget soon, if indeed ever. That chart of interest on the national debt shows exactly why.

Box 6 on page 20 gives "A History of Budget Triggers in the US". Unfortunately, the success rate has been horrendous for various reasons.

Would another set of more comprehensive triggers be any better? The answer is perhaps. The reason is there are distasteful provisions that affect both parties as well as provisions both parties would like.

Republicans would be in favor of forced spending cuts, Democrats in favor of forced tax hikes. Both sides just may take that into consideration before passing more pork barrel legislation.

Color me skeptical, but another go at triggers probably cannot hurt. Regardless, triggers or not, something has to give because the US is on a path to fiscal ruin.

For additional discussion, please see Deficit Reduction: Are Higher Taxes and Reduced Military Spending Coming? Can the "Gang of Six" Accomplish Anything?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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