The Reality: An Economy Runs on HOPE

While reading a report today on the current economic "meltdown" going on in overseas markets, I came across this paraphrase of George Soros.

Billionaire investor George Soros said he believed the United States was already experiencing the pain of a double dip recession and that Republican opposition to Obama's fiscal stimulus plans was to blame for sluggish growth.

Of course, Mr. Soros's actual words were far more nuanced. But this reflects the current reality of politics - both sides are more interested in blame than giving the electorate a clear view of their choices.

So, let me give it a try. I add the disclaimer that I am NOT an economist, and I am sure many economists would ridicule my explanation as overly simplistic. You judge for yourselves.

Everyone agrees we are in the middle of a bad situation. To use a fairly standard analogy, the economy is on fire.
--> Democrats want to beat the fire by spending more. They want to use borrowed money to build the economy faster than the fire can destroy it.
--> Republicans want to beat the fire by spending less. They want to fix the underlying causes of the fire right away, trusting the fire to go out on its own, which will eventually allow new building to resume safely in the future.

But both sides are dismissive of the opposition:
--> Democrats say the Republican plan is like revising building codes in the middle of a fire - it does nothing for those suffering NOW.
--> Republicans say the Democratic plan is like adding fuel to the fire while it is still burning - it may make it harder to see in the short-term, but in the long term it just makes the fire worse.

The problem is, a "fire" is a bad analogy for analyzing the Economy. A fire attacks concrete things, destroying them, requiring people to grow new trees, mine new steel, and use human labor to put it all back together. The Economy, on the other hand, is a more nebulous concept. Value is something which exists in the mind of a human being, based on some "real" factors (like supply and demand) but also based on intangible factors (like desire and status). Value can be created from nothing - consider what you are buying when you buy a baseball card or purchase a Netflix subscription - and can be destroyed without anything concrete having been destroyed (as when a writer is found guilty of plagiarism or fraud). The economy is not built on debt or savings, but rather on HOPE.

Look at it this way.
--> If you have HOPE to have a family, you'll buy a house for them. If you have no hope, why bother?
--> If you have HOPE that you'll have a job tomorrow, you'll take the time to buy more than the essentials. If not, you'll hoard what you have.
--> If you have HOPE to eventually become employed, you'll invest time, money, effort in education. If not, you'll look for ways to pass the time.
--> If you have HOPE that you'll be repaid, you'll extend a loan. If not, you'll keep the money to yourself and invest in treasury bonds.

So, do Democrats or Republicans have the right solution? Neither. Both. It is not a question of finding the right value for a variable in the equation. It is a matter of convincing people there is HOPE for the future, so they will act, spend, and invest. And at the moment, all the Federal Government has done is convince people to look elsewhere for HOPE.

Keep that in mind this next election season.

Does the Death Star make economic sense?

I am a Star Wars geek. I know far more trivia about the Original Series, Prequel Series, and Expanded Universe than is healthy for me. And Wardo, CRChair, and Sean can attest that we've had more than our share of conversations about the minutiae of George Lucas's universe. But I am not sure we have ever had a discussion quite on the level of this analysis of the economics of the Death Star (WARNING! There's some salty language in spots) which uses various economic and political theories to analyze whether or not the Emperor's pet project - THE DEATH STAR - really makes sense on a macro-economic scale.

The more you spend on bureaucracy, the less control you have directly over your Empire. The less you spend on bureaucracy, the more you have to tighten your grip, and the more star systems slip through your fingers.

So, the Emperor and Tarkin focus on making one really huge, high-impact investment: The Death Star. They throw in Alderaan as part of that investment. This doomsday weapon will supposedly free up their resources to spend less on administration, personnel and infrastructure, and continue to function without a Senate. It seems like a big investment until you realize how much they save by not actually having a functioning government.

This is an attractive option even today, as politicians look to pay for tax cuts and handouts to core constituencies by laying off or cutting salaries and benefits for bureaucrats and government workers, as well as by skimping on infrastructure.

The problem, of course, is that it doesn’t work. The underpaid, undermotivated, poorly managed stormtroopers can’t even track down the Empire’s most wanted fugitive androids in an extremely sparsely populated area where they have undisputed control. If Tatooine still had meaningful senatorial representation and local government, Luke never would have gotten off the planet.

If you love Star Wars, I must say this article is a must-read piece.

Yeah, that's pretty much how I see it

Eric Allie political cartoon from Townhall.Com.

Economics, not philosophy, will end our oil dependence

We've known for decades that our dependence on Oil has a lot of downsides for us - pollution-producing extraction processes, Middle Eastern tyrants, risks of spills, the non-sustainable nature of oil stocks, etc. - and yet we've barely made a dent in changing over to alternative sources of energy. Even technologies like hybrid cars are merely more efficient, or trade off prices at the pump for prices at a central power plant. Philosophy and long-term self interest are not doing the job of moving us to a post-oil future.

What is? Simple economics. Pepsi has just announced a new plastic bottle produces NOT from oil, but from plant byproducts. And they didn't do it for philosophical reasons. They did it because PepsiCo produces hundreds of thousands of tons of plant waste every year on their food products, which they can reuse to produce packaging. Saving them millions.

The bottle is made from switch grass, pine bark, corn husks and other materials. Ultimately, Pepsi plans to also use orange peels, oat hulls, potato scraps and other leftovers from its food business.

The new bottle looks, feels and protects the drink inside exactly the same as its current bottles, said Rocco Papalia, senior vice president of advanced research at PepsiCo.

"It's a beautiful thing to behold," he said. "It's indistinguishable."

Are extreme tax hikes during a recovery brave or foolish?

CT Governor Dannel Malloy has released his budget and it is a doozy. In an attempt to close the budget gap, he is proposing huge tax increases on nearly everyone and everything.

In one of the largest and most wide-ranging tax increases in Connecticut history, taxes on income, cigarettes, alcohol, gasoline, and estates would all increase under Gov. Dannel P. Malloy's budget proposal to be unveiled Wednesday.

The current 6 percent sales tax would also rise for the first time since the state income tax was created in 1991 - to 6.25 percent...Malloy is also seeking to eliminate the sales-tax free week, which is popular among families as it is held in August for back-to-school shopping. Overall, Malloy is proposing more than 50 different tax changes in a package that would increase taxes by $1.5 billion in the first year and $1.34 billion in the second year.

The taxes are so wide-ranging that they would touch anyone who earns a salary, drives a car, gets a haircut, buys clothing, sleeps in a hotel, takes yoga lessons, pays for a manicure, smokes cigarettes, drinks alcohol or takes a poodle to get a haircut.

I am not sure what to think of the governor at this point. On the one hand, this is a courageous move in the era of the Tea Party. While CT is about as blue as they come, there are plenty of anti-tax protesters ready to come out in force. On the other hand, this seems sure to stifle any nascent economic recovery in the cradle and drive businesses out of the state altogether.

Then again, "brave" and "foolhardy" are not always mutually-exclusive terms. Here's hoping the CT Congress can moderate these terms into something the state can live with. Otherwise, it may be time to think about checking out job opportunities elsewhere.

Cost-of-Living can sink Employment

State legislators tend to think employers are privileged to be able to do business in their state. But the fact is that the decision of location is like any other for a company - cost vs benefit. And recently the CEO of Aetna (based in the state of Connecticut) had some hard words for CT Governor Dannel Malloy.

In short, the Hartford-based health insurer could add workers anywhere around the globe as it grows its health-technology business. Forty percent of Aetna employees today work from home full-time.

"We've done the analysis, and, quite frankly, Connecticut falls very, very low on the list as an environment to locate employees . . . in large part because of the tax structure, the cost of living, which is now approaching, all in, the cost of locating an employee in New York City," he said.

As states consider how to resolve their budget deficits, they need to keep in mind that it is not a problem solved in isolation. Businesses can and will relocate. And it is the best solutions that will keep and gain business tax revenue.

11% of All U.S. Homes Are Vacant

How bad is the housing market? Bad and getting worse. As of now, 11% of all U.S. homes are empty. Can you imagine how desperate builders and real estate agents must be at this point?

So think about it. Eleven percent of the houses in America are empty. This as builders start to get more bullish, and renting apartments becomes ever more popular. Vacancies in the apartment sector have been falling steadily and dramatically, why? Because we're still recovering emotionally from the toll of the housing crash.

Younger Americans have seen what home ownership has done to their friends and families, and many want no part of it. Credit has become very nearly elitist. Home prices, whatever your particular data provider preference might be, are still falling.

This is not a recipe for a recovering economy.

Say it ain't so, Tastykake!

If you grew up in the Philadelphia metropolitan area, it is likely that Tastykake was a treasured part of your childhood. In my pre-weight-loss era of life, Krimpets alone just about made up one of my Food Groups. I still enjoy their sugar-free options. So, it is with sorrow that I read that Tastykake is considering selling out in the face of growing challenges in their financial situation.

Tasty Baking Co. president and chief executive Charles Pizzi said in a statement that "unanticipated operational challenges" related to its new bakery in Philadelphia's Navy Yard had lowered projected savings for the fourth quarter of 2010 by $3 million to $10 million.

The company's shares plunged more than any other on the Nasdaq, giving up 37 percent of their value and hitting a 52–week low of $3.83 before closing at $4.05.
The company cited a bankruptcy filing by the owner of the A&P, Super Fresh and Pathmark grocery chains and rising commodity costs as contributing factors to the financial squeeze and said it was looking at all options.

I truly hope Tastykake can pull out of the death spiral and be restored to its former glory. Otherwise, I hope any would-be buyer would keep around the old brand in some form, instead of just adding any signature offerings to their own line-up.

Broken Window Theory

When Rudy Giuliani became mayor of New York City, he enacted a number of major reforms based on "Broken Window Theory." An ultra-simplified version of the theory might be summarized as "Small crimes lead to big crimes." A broken window (vandalism) leads to the presence of junkies (since clearly no one is there to fix the window) leads to the presence of drug dealers and mobsters leads to violence on the streets as gangs clash, leads to murder.

Giuliani's work in NYC speaks for itself. After riots in the streets under his predecessor, New York reached historic lows for crime and especially violent crime. And his successor has kept crime low, despite the economic pressures of the Great Recession.

Unfortunately, many communities have apparently not learned the lessons of NYC. In order to meet the budget, they are now openly announcing that reports of "minor" crimes will be ignored, as the police force focuses on "major" or "violent" crimes. If "Broken Window Theory" is right, we know what to expect afterward. A marked increase in all kinds of crime, which the cash-strapped, under-manned police force will be even less able to handle.

Cutting waste is one thing. But in our quest for austerity, we must remember the essential services that a society exists to provide. Safety and security is at the top of that list.

Housing Prices Lowest in 15 Years

Economics is a fascinating and frustrating "science". Why? Because it all comes down to human perception. Things are worth what we collectively think they are worth. "Intrinsic value" has very little meaning for most things in the modern economy. We're seeing this in the housing market where people are holding off buying not because prices are too high, or mortgages are impossible to get, but because of a collective sense that things are getting worse.

One reason the market is hurting is that buyers and sellers are in a standoff over prices. Many sellers are reluctant to lower their prices. And buyers are hesitating because they think home prices haven't bottomed out.

"It really is a self-fulfilling prophecy," said Aaron Zapata, a real estate agent in Brea, Calif. "If all buyers perceive that home prices are coming down, then they will stop making offers -- and home prices will come down."

Of course, in the middle of the Great Recession, people are also loathe to take on a new, massive 30 year pile of debt. Still, we all know when house prices will turn around. When we collectively decide they should!

It begins - CT has its bond rating cut

My home state is the first, but it won't be the last. Ratings agencies are beginning to cut the bond ratings for the state. This will make it much more expensive to raise funds in the future

Connecticut is preparing to borrow $956 million to close a budget gap in the fiscal year beginning July 1, after borrowing money last year to cover a deficit of $947.6 million. Not good. Fitch has reduced the states credit rating from AA+ to AA.

President Obama's solution the the Oil Spill: More Taxes

There is a truism of government - you don't tax businesses, you tax their customers. Every tax placed on a business is passed along to customers in higher prices. So when a politician both claims "taxpayers will not pay for the BP cleanup" and that it will be paid with by higher taxes, be skeptical. Be very skeptical.

Lawmakers want to increase the current 8-cent-a-barrel tax on oil to make sure there is enough money available to respond to oil spills. At least 6 million gallons of crude have spewed into the Gulf of Mexico since a drilling rig exploded April 20 off the Louisiana coast.

President Barack Obama and congressional leaders have said they expect BP to foot the bill for the cleanup.

"Taxpayers will not pick up the tab," Senate Majority Leader Harry Reid, D-Nev., said Monday.

BP executives told Congress last week they would pay "all legitimate claims" for damages. But the government needs upfront money to respond to spills, as well as money to pay for cleanups when the responsible party is unable to pay, or is unknown. Money spent from the fund can later be recovered from the company responsible for the spill.

It is a good point that funds are needed for immediate work on the current spill. But we should all be aware this will mean higher prices at the pump for all of us. Especially heading into summer. Which will cause people to travel less, and depress the economy even more.

Utah flirts with abolishing Senior Year

We all knew a few of "that type" of student. The ones who worked hard all thru high school and as soon as they were accepted to college, they stopped trying at all. Of course, most of "that type" learned too late that colleges (1) keep an eye on early admissions, and (2) are able to rescind an acceptance if they see grades slacking off. Still, at least one legislator in Utah is exploring the option of eliminating the Senior Year of high school altogether or at least making it optional. But it is not with the good of the students in mind - it is an attempt to close a serious budget gap.

The sudden buzz over the relative value of senior year stems from a recent proposal by state Sen. Chris Buttars that Utah make a dent in its budget gap by eliminating the 12th grade.

The notion quickly gained some traction among supporters who agreed with the Republican's assessment that many seniors frittered away their final year of high school, but faced vehement opposition from other quarters, including in his hometown of West Jordan..."You're looking at these budget gaps where lawmakers have to use everything and anything to try to resolve them," said Todd Haggerty, a policy associate with the National Conference of State Legislatures. "It's left lawmakers with very unpopular decisions."

Why It's Still Good To Live In The USA

Delia Lloyd, an American writer living in London, wrote an interesting article on why it's still good to be the USA. It's an interesting read and a pick me up to all of the gloom out there.

Are layoffs killing, rather than saving, our companies?

When the Great Recession hit, layoffs were the go-to strategy for most companies. They cut works left and right in an effort to increase efficiency, and dump long-term liabilities Newsweek is running an interesting article summarizing a series of studies on the effects of layoffs on companies, and the results are interesting. For the most part, layoffs lead to less productivity and less profitability for companies.

Layoffs don't even reliably cut costs. That's because when a layoff is announced, several things happen. First, people head for the door—and it is often the best people (who haven't been laid off) who are the most capable of finding alternative work. Second, companies often lose people they didn't want to lose. I had a friend who worked in senior management for a large insurance company. When the company decided to downsize in the face of growing competition in financial services, he took the package—only to be told by the CEO that the company really didn't want to lose him. So, he was "rehired" even as he retained his severance. A few years later, the same thing happened again. One survey by the American Management Association (AMA) revealed that about one third of the companies that had laid people off subsequently rehired some of them as contractors because they still needed their skills.

Another interesting correlation often forgotten by management is that your employees are also your customers. Every employee laid off is an employee no longer able to afford your services. This can lead to a downward spiral as every lost employee cuts demand, which leads to calls for more cuts.

Clearly, we need to rethink the knee-jerk turn to layoffs when the economy goes south. I am hoping no one calls for a legislative solution here. Better it come from the managers themselves. But it may be inevitable.

Teens disrupt Trumbull Mall

Yeah, I admit it. This is only posted because it happened nearby my own location. But it is proof of what happens when you combine high unemployment with rainy weather - teens with nothing to do will find something to occupy themselves. "Idle hands are the devil's tools."

Hundreds of teenagers became embroiled in a melee and were ejected Saturday night from the Westfield Trumbull mall after harassing customers and exhibiting "rowdy and disruptive behavior."

That resulted in a 17-year-old Bridgeport youth being stunned by a town police officer after charging and knocking the officer to the ground outside the mall, police said.

Here's hoping 2010 is a better year for the economy, so these kids can have better things to do with their time.

Christmas Cynicism

Do you believe in political illusions?

From here.

Whack-A-Banker?

Since I work in the financial services field (in Information Technology), it is no surprise to me that there is hostility to banker out there. Even before the Great Recession, bankers were often hated for obscure fees, labyrinthine rules, and a general lack of empathy. (Honestly, most of the banker I have known have been good people who went out of the way for their customers, but this is the perception.) When the crash came, things got even worse since the direct cause blamed was the Mortgage Derivatives market - clearly the fault of financial services management.

Now, one arcade owner is making a mint by taking advantage of anti-banker animosity with a retooled Whack-A-Mole called "Whack-A-Banker". The owner claims it is so popular, he keeps having to replace worn-out mallets.

When Piracy Goes Wall Street

The Somali pirates have implemented a plan that is pure genius. They have set up a stock exchange where anyone can invest in one of (currently) 72 "companies". If a company you have invested in gets ransom money, you profit. Not only does this help fund the pirate activities, but it gives the local people a reason to support the pirates. On top of this, the pirates share the ransom money to help pay for items such as hospitals and schools. While I don't condone the actions of the Somali pirates, I understand that they are trying to prevent further destruction of their waters and get reparation for the damage already done.