Monday, June 02, 2008

Adjusting To The New World Order


Last year, I wrote a series of posts about the proposed, then enacted, then repealed Michigan Service Tax [see links at bottom of the right column]. This was an ill-conceived and ill-timed venture into bleeding a sick patient... 18th century medicine for 18th century economics.

The State then "compromised" by jacking up the existing business tax so that businesses were often being charge several multiples of their previous taxes. Ditto.

Meanwhile, the State was alternately projecting deficits and surpluses based on various accounting surprises. Regardless, the approach was the same: increase budgets during a severe state economic recession. During all of this, my position remained the same: the State needed to budget according to the situation... cut the budget by 5%. Do what any business does when things get tough... do more with less... or at least do the same with less.

That's a difficult and foreign concept to governments. Governments have commitments! So do individuals and businesses. The difference is that governments too often see every program as a necessary commitment. Individuals and businesses understand that there are times when some spending simply has to stop or be reduced significantly. When a government fails to understand that, it comes in conflict with its residents and businesses. When that happens, residents and businesses leave.

That result is the opposite of the stated goal of this state's government.
Today's Detroit News ran the following headline: Michigan braces for another messy fight over budget, taxes
The fiscal experts say the national economic drop-off, skyrocketing gas prices, declining housing industry, lucrative tax credits and restructuring of the domestic auto industry will sock the struggling state -- leaving the treasury $472 million short of tax revenue projections made just five months ago.

As a result, lawmakers will try to make ends meet as they negotiate a deal over the next several weeks for the budget year that begins Oct. 1.

All sides have vowed not to raise taxes again this year. But spending for schools and colleges, municipal governments, job training and nursing programs, and Medicaid as well as tax breaks for filmmakers, the working poor and business all will be on the table.


"We won't be able to do the $600 million increase in spending the governor has proposed, but I want to see some modest increase, especially in higher education and community colleges and programs to help the less fortunate."
It's time to set priorities. It is also time to closely examine our assumptions. It is definitely time to set conditions upon any aid being provided. I'll give a "for example."
Rather than give scholarships or grants or other forms of educational aid without conditions, offer up loans [as available] that can be partially forgiven if the student completes the degree or program... and works in Michigan or for a Michigan company for a minimum of two years.

One of the biggest problems with the present government strategy of supporting universities and students with gifts of money is that the students leave the state to work elsewhere. We pay and other states benefit. At a minimum, the State should get its money back from the students if they leave for another state.
The point is that it's time for government to be more businesslike. Government has spent far too much trying to be coddling parents to its people rather than a steward of the commonwealth.


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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
The Independent (UK)

Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)