The cap-and-trade tax will inescapably and adversely impact the economic recovery and future growth rates. If passed, it will act on the economy as a whole exactly the way a governor acts on a steam engine, increasingly resisting any increase in revolutions per minute. With the supply of licenses to emit carbon dioxide fixed, the price of the permits will inevitably rise as economic activity picks up. That means that any increase in overall demand will increase the price of energy, and thus, in a feedback loop, nearly everything else. That will damp down demand. The more the economy tries to speed up, the more the carbon tax will work to prevent it from doing so.
The same is true of many of the other policies embedded in Obama’s budget. He will raise taxes on high earners rather than lowering them to give those earners an incentive to put their money into the private markets. He intends to increase the number of federal regulations on private business and industry, rather than reduce the number of those regulations for the purpose of eliminating barriers to growth. Taken together, these counterproductive actions will make job creation in the private sector difficult, because they will make it more expensive to hire new workers. The Obama plan will, in general, make it more expensive to do business at a time when one would think he and the nation as a whole have every reason to make it as inexpensive as possible to do business.
I'll bet that the average American has no idea how much cap-and-trade will work as a tax against him in the near future, and how this is something that will be more permanent than temporary.
He has commented on this before, but Thomas Sowell wrote another article yesterday lamenting the hypocrisy of Democratic leaders harping so heavily on the AIG executive bonuses. He mentions:
What makes this all the more painfully ironic is that it is precisely those members of Congress who have had the most to do with creating the risks that led to the current economic crisis who are making the most noise against others, and summoning people before their committee to be browbeaten and humiliated on nationwide television.
No one pushed harder than Congressman Barney Frank to force banks and other financial institutions to reduce their mortgage lending standards, in order to meet government-set goals for more home ownership. Those lower mortgage lending standards are at the heart of the increased riskiness of the mortgage market and of the collapse of Wall Street securities based on those risky mortgages...
Securities based on risky mortgages are what toppled financial institutions but it was the government that made the mortgages risky in the first place, by making home-ownership statistics the holy grail, for which everything else was to be sacrificed, including commonsense standards for making home loans.
Politicians and bureaucrats micro-managing the mortgage sector of the economy is precisely how today's economic disaster began. Why anyone would think that their micro-managing the automobile industry, or executive pay across a wide sweep of other industries, is likely to make things better in the economy is a mystery.
And just a couple of quick items that came via Carpe Diem:
And last Friday there was an interview with Nobel Prize winning economist Gary Becker in the Wall Street Journal. The interview is presented here. I guess I like this article because much of what he says line up with my own thoughts on the current state, so it's nice to feel validated by someone so smart. A couple of key paragraphs:
Mr. Becker sees the finger prints of big government all over today's economic woes. When I ask him about the sources of the mania in housing prices, the first culprit he names is the Fed. Low interest rates, he says, were "partly, maybe mainly, due to the Fed's policy of keeping [its] interest rates very low during 2002-2004." A second reason rates were low was the "high savings rates primarily from Asia and also from the rest of the world."
"People debate the relative importance of the two and I don't think we know exactly," Mr. Becker admits. But what is clear is that "when you have low interest rates, any long-lived assets tend to go up in price because they are based upon returns accruing over many years. When interest rates are low you don't discount these returns very much and you get high asset prices."
On top of that, Mr. Becker says, there were government policies aimed at "extending the scope of homeownership in the United States to low-credit, low-income families." This was done through "the Community Reinvestment Act in the '70s and then Fannie Mae and Freddie Mac later on" and it put many unqualified borrowers into the mix.
The third effect, Mr. Becker says, was the "bubble mentality." By this "I mean that much of the additional lending and borrowing was based on expectations that prices would continue to rise at rates we now recognize, and should have recognized then, were unsustainable."
...
On the subject of recovery, Mr. Becker repeats his call for lower taxes, applauds the Fed's action to "raise reserves," (meaning money creation, though he said this before the Fed's action a few days ago), and he says "I do believe one has to try to do something more directly to help with the toxic assets of the banks."
...
Mr. Becker is underwhelmed by the stimulus package: "Much of it doesn't have any short-term stimulus. If you raise research and development, I don't see how it's going to short-run stimulate the economy. You don't have excess unemployed labor in the scientific community, in the research community, or in the wind power creation community, or in the health sector. So I don't see that this will stimulate the economy, but it will raise the debt and lead to inefficient spending and a lot of problems."
There is also the more fundamental question of whether one dollar of government spending can produce one and a half dollars of economic output, as the administration claims. Mr. Becker is more than skeptical. "Keynesianism was out of fashion for so long that we stopped investigating variables the Keynesians would look at such as the multiplier, and there is almost no evidence on what the multiplier would be." He thinks that the paper by Christina Romer, chairman of the Council of Economic Advisors, "saying that the multiplier is about one and a half [is] based on very weak, even nonexistent evidence." His guess? "I think it is a lot less than one. It gets higher in recessions and depressions so it's above zero now but significantly below one. I don't have a number, I haven't estimated it, but I think it would be well below one, let me put it that way."
Anyway, thought those were worth passing along...
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