Notes on the Economy – 04/24/08

1.  In less than a year, we’ll have a new CEO running USA Inc., our 14 trillion dollar enterprise.  Changing CEO’s is expensive, moving the old staff out, bringing in the new and teaching them where the bathrooms are.  Overall, $8 million is budgeted for the Bush transition.  Once done, he will receive about $400,000 per year to cover his expenses and retirement.  His dad does even better, receiving about $800,000 a year.  The top dog, however, is Clinton, receiving $1.2 million annually, which includes $500,000 for his office rent in Harlem, $200,000 in retirement pay, and $80,000 for his phone bill.

If this sounds high, it’s not.  Private sector CEO’s of even modestly large companies receive much more compensation, even including the rent.  We don’t pay well for running the largest business in the world, the U.S. economy.  Hmmmm, maybe that’s the problem!

2.  Some presidential candidates have decided that Exxon is a symbol of what is wrong with America.  Recent ads complain of Exxon’s 40 billion in profits as if Exxon is some evil entity.   First of all, Exxon is not a person, it is millions of owners owning over 5 billion shares in their investment portfolios.  Vanguard holds over 160 million shares for its clients, Fidelity over 100 million shares.  Taking Exxon’s profits for hair-brained government schemes will just mean millions of people will have to work longer to accumulate their retirement assets.  And, doesn’t return on investment count?  40 billion may not represent a particularly good return on the capital invested in the company.  Size is not the issue, the percentage return is what counts.

And the government takes over 40 cents a gallon in tax, far more than the profit per gallon made by refiners.  And the government doesn’t make any gas for you.

Hopefully voters will catch on to this sham.  The last thing we need is government confiscating private sector profits and driving stock prices down.  No help for our retirement and no help for the economy.

3. The plan to take Clear Channel, a large media company, private appears to have fallen through.  The banks that were going to loan investors the $20 billion needed to buy all the public stock back decided they didn’t have enough capital to do the deal due to losses on their mortgage portfolios.

However, I can’t see why this matters much.  The company is running now as a publicly owned business, taking it private won’t change that and it won’t produce any new jobs or GDP.  It does mean that some very highly paid investment bankers won’t get their fees, but what else will change at Clear Channel?  Not much that I can see.  This is much ado about nothing.

If banks feel they don’t have $20 billion to lend to a private company to buy Clear Channel, that’s fine.  It is not the beginning of the end, just the reflection of financial markets heading back to a more normal credit environment.

4. The news media, reporting on Federal Reserve actions, keeps talking about breathing new life into the housing market.  Let’s be clear, over the past few years, we built a million homes and condos more than we need to house our population.  So, even if the Fed lends builders free money, they are not going to build yet another new house that nobody will buy.  It’s like playing musical chairs, but with too many chairs.  As the players move from one chair to another, they leave an empty chair behind.  There are not enough families to live in the houses we built.  Only time will solve this problem, population growth, maybe increased multiple home ownership among baby boomers, maybe foreign owners.  The point is that cutting interest rates won’t get rid of the excess supply of houses.

Cheap money also won’t get firms to invest in new equipment and expansion or hire more workers with the Fed warning about a recession.

Finally, cheap money won’t get the big Wall Street firms to lend to each other to finance those mortgage assets.  Poof, Bear Stearns disappears.

In the meantime, inflation is getting worse.  More business owners cite inflation as their top business problem than at any time since 1982.  That’s a warning.

5.  Recently Bill Gates expressed some doubt about the ability of markets and capitalism to help the poor around the world.  He was distressed about the poverty that still existed in many countries.

However you measure it, poverty cannot be eliminated overnight, not in a decade, not in a generation.  But, as the United Nations reported recently, countries that have adopted capitalism in some form have prospered.  Not everyone is lifted out of poverty, but more and more are.  Lexus is building a new plant just to serve demand in China where a middle class is rapidly developing.

What Mr. Gates should have observed is that poverty is still pervasive in countries where the leadership does not allow capitalism to flourish.  Dictators and despots and government bureaucrats prevent capitalism from doing it’s good work, keeping citizens in poverty.  Given the opportunity to improve their situation, individuals will succeed, as long as they have the freedom to do so.

6.  Our new police chief recently went to Washington to ask for federal money to hire more police officers and improve our police stations.  Of course he should try to get the funding if it is available.  But this illustrates why federal spending is out of control.  Everyone thinks that Washington should solve all of our problems.

Police department needs in Philadelphia are not a national problem.  It’s a Philadelphia problem.  A few years ago, our governor went to Washington for snow removal money.  Please!  Snow removal is a local problem, not a national one.  But that’s the game.  State and local officials put on their knee pads and go to Washington to pay homage to Congress and try to get someone else’s money to pay for local problems.  So California tries to get Pennsylvania to pay for earthquake damage, Midwestern governors try to get Pennsylvanians to pay for flood damage and so on by going to Washington to get some of our tax dollars.  Congress loves the power, but is a most inefficient middleman.  Why send money to Washington and then ask for it back?  Congress can’t solve local problems.  Let’s keep our tax money here and solve our own local problems.

7.  America’s farmers are the best in the world.  We export large amounts of food to countries who cannot grow food as cheaply.  So why does Congress have to give tens of billions of dollars to our farmers?  Corn and wheat prices are at record levels.  But between 2003 and 2005, the government gave corn farmers nearly 20 billion in subsidies — 7 billion to cotton growers, 4 billion to wheat farmers, 1 billion to peanut growers, and the list goes on.  In many years, subsidies account for substantially more than half of farm income.

Even worse, the so called family farm doesn’t benefit.  Two thirds of the subsidies go to the wealthiest 10 percent of farmers, including agribusiness.  And subsidies to crops like cotton, which we can’t grow efficiently, make it hard for less developed countries to earn income growing the crop.  So taxpayers’ money is paid to cotton growers who make life difficult for poor farmers in less developed areas to make a living.  It doesn’t make sense.  Government can help protect farmers from the vicissitudes of the weather, but the current program is clearly out of bounds.

8.  For two decades, I have commented periodically on the fortunes, usually misfortunes, of Philadelphia Gas Works.  It is a classic example of why countries in which government runs business do so poorly.  Government can’t run businesses well.  There is no incentive to be efficient and take care of taxpayers and their money.

The Parking Authority saga is just another point in case.  Employment is bloated and promised support for our school system has been squandered through patronage and inefficiency.  And now we find out that the workers are bleeding the Authority through worker compensation claims.  The Inquirer has discovered that working at the Parking Authority is far riskier than working in the Fire or Police Departments.  Parking Authority workers file twice as many injury claims and on average receive 50 percent more per injury claim than firefighters and nearly twice as much as police officers.   Hey, how about letting government take care of healthcare?  They do such a good job with all these other businesses.