Business and Economics: May 2010 Archives

Isn't it ironic that just as President Obama plans to make a push for Cap-and-Trade in an effort to generate "green jobs" and develop alternative energy sources the Spanish are ready to abandon their efforts to do so?

Apparently the Spanish program has failed miserably, driving up energy costs, putting a big drain on their already fragile economy, while creating very few green jobs. Their intentions may have been good but the actual results have been poor, with none of the promised benefits materializing.

This is the program Obama wants to emulate? Even the Spanish know that isn't such a great idea.

The president of the United States, Barack Obama, doesn't seem to have chosen the right model to copy for his "green economy," Spain. After the government of José Luís Rodríguez Zapatero demonized a study of different experts about the fatal economic consequences of renewable energies, an internal document from the Spanish cabinet that it is even more negative has just been leaked.

The internal report of the Spanish administration admits that the price of electricity has gone up, as well as the debt, due to the extra costs of solar and wind energy. Even the government numbers indicate that each green job created costs more than 2.2 traditional jobs, as was shown in the report of the Juan de Mariana Institute.

But none of this has deterred Obama's plans to lay a heavy burden upon the American people and the American economy all in the name of "saving the planet."

Why is it our President feels the need to do everything he can to cripple the economy with pie-in-the-sky feel-good laws that, in the end, do far more harm than good? Until recently I would have said it was due to his blindness to the evils of socialism. Instead, I have to think that it is something far more basic: he's an incompetent surrounded by incompetents (his advisers).

As the old saw goes, "Never attribute to malice that which can be adequately explained by stupidity."

Obama may have book smarts, but he has never exhibited one ounce of intelligence or aptitude when it comes to governing the country. Then again, he never had any executive or economic experience before he was elected to the Oval Office. The only thing he's been good at has been getting elected.

Isn't it interesting that while the White House is telling us things are so much better that the Dow closed down almost 400 points on Thursday, dragging the rest of the world markets with it? Even with the recovery of one-third of Thursday's losses on Friday, the market is still jittery. Jobless claims are up and businesses are wary of claims that the economy is turning around, not willing to go out on a limb by investing what money they do have on something that so far appears to be wishful thinking.

I don't know about you, but a lot of the business owners I know aren't buying the "Economy's getting better" mantra. While a few of them have seen a slight uptick in business, most haven't.

The price of oil has dropped almost 20% since April. Even gas prices at the pump have been falling at a time when they usually rise. (The price locally hit $2.599/gallon today, down almost 20¢ since last week.) We should keep an eye on the price of gas as we approach Memorial Day weekend, which signals the unofficial start of the summer tourist season. It usually starts heading upwards in earnest in anticipation of the increase in demand usually seen between then and the end of August.

So far I'm not seeing much of a recovery, at least not here in New England.

On a number of occasions I have mentioned the Laffer Curve, an illustration of the relationship between tax rates and tax revenues and how once tax rates fall above or below a certain point tax revenues fall off. It is a simplistic illustration but no less correct for its simplicity. Simply stated, if the tax rate for a given tax is either 0% or 100%, the amount of revenue collected will be zero. As the tax rate moves away from either extreme the amount of revenue increases. The trick is to figure out the magic tax rate that maximizes the revenue collected. And that magic number will be different depending on what kind of tax is being imposed, meaning the tax rate on income that maximizes revenue will be entirely different from the tax rate on sales of goods and services, and so on.

It can be argued that the taxes we pay to the federal government are well above the sweet spot, meaning that when the government increases taxes the expected revenues will not meet projections. Others seem to believe no tax rate is too high and that the rich, meaning those of us with jobs that actually pay taxes, should have even more of our money taken from us to fund things we neither need or want.

Now comes what is being called Hauser's Law, which states that regardless of the total tax burden of the American taxpayers (this includes all taxes imposed, and not just on individuals), the revenues collected will be less than 20% of Gross Domestic Product. The chart below, created by using the National Income Accounting method rather than the CBO or OMB methods, shows that since 1929 the revenues collected have always been below 20% of the GDP. (The chart isn't all that clear, but it is readable...sort of.)

Hauser Chart.jpg
Click on image to enlarge

As tax rates increase economic activity slows when billions are siphoned out of the economy and used for non-wealth producing activities. The more money siphoned out of the economy, the more economic growth declines and the less revenue is collected by the government. Hauser's Law implies the Laffer Curve, showing revenues fall as taxes rise or fall above a certain point.

What's the origin of this limit beyond which it is impossible to extract any more revenue from tax payers? The tax base is not something that the government can kick around at will. It represents a living economic system that makes its own collective choices. In a tax code of 70,000 pages there are innumerable ways for high-income earners to seek out and use ambiguities and loopholes. The more they are incentivized to make an effort to game the system, the less the federal government will get to collect. That would explain why, as Mr. [W. Kurt] Hauser has shown, conventional methods of forecasting tax receipts from increases in future tax rates are prone to over-predict revenue.

Far too often those projections fall victim to the Law of Unintended Consequences, where higher taxes on some economic activity discourages that activity, in turn lessening the activity being taxed and reducing the revenues expected. (Ayn Rand wrote about that over 50 years ago in Atlas Shrugged, though she's not the first to do so.)

But we know that won't stop our tax and spend Congress from taxing the hell out of everything that moves in an effort to pay for all the 'free' programs they and the President are trying to shove down our throats. Too bad they'll be limited by Hauser's Law, meaning they'll keep spending far more than they will ever be capable of collecting in taxes.
In the years I've been working in the high tech industry I've seen wondrous innovations created by a select few that were truly mind-boggling. Sometimes it would be the application of a new technology or the use of an existing technology in a fashion the creators had never envisioned.

It is innovation that has driven the US economy for decades, something that rolled on year after year. Unfortunately the conditions that allowed Americans to innovate such things has slowly been dismantled, primarily by those not understanding the creative process. They have tried to mandate innovation and schedule it, all to no avail. It doesn't work like that.

Managers need to hire innovative people if they want to get innovative ideas. But innovative people will be dreamers and tinkerers who often make mistakes and are not rigorous in their documentation or calculations. They refuse to wear the blinders required to complete day-to-day tasks. They become obsessed with ideas and work in bursts. If they can be paired with detail-obsessed workers who will document and keep projects on track, companies will get good products.

Unfortunately, we are plagued with managers who traded imagination for ambition and got ahead through aggression and checking boxes. These people create innovation programs that require committee approval before each step, so only the safest and most-obvious changes ever get through.

Innovation isn't always about asking "What if?" It's also about "Why not?"

Today not enough people are asking either of those questions because they would never make it past management, so they don't bother.

There's a story told about Henry Ford when he was showing some stockholders around one of his factories. As he was escorting them around they passed by an office in which a man was sitting behind a desk, leaning back in his chair, his feet on top of the desk and his hands behind his head, staring at the ceiling. When asked by one of the incredulous stockholders why the man they saw wasn't working, Ford replied, "He is working. He's thinking. The last time he thought he saved this company almost $2 million." ($2 million back then was equivalent to $23 million today.) The man was an innovator, finding new and better ways to do things. Most of his innovation process consisted of sitting back and pondering over a problem until he came up with a solution. It didn't matter if it took him a lot of time to do so, because in the end he helped the company make more money by making it less costly to build automobiles.
Back in June 2008, I predicted the Law of Unintended Consequences would assert itself in regards to the increase of the minimum wage.

Time has proven me right.

A sign of those unintended consequences can be seen in a memo from an employer to his employees, explaining why he's cut back on their hours across the board even though he wishes he could give them all the hours they'd like.

This is yet another example of how government intervention in the economy has a negative effect that far outweighs any possible positive effect that was used as the justification for such an intervention. Something as simple as raising the minimum wage 40% over three years can turn a money-making business into a money-losing business in very short order. I don't know of any business (other than government) that can absorb a 40% increase in labor costs and not suffer the consequences.

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