BerkAdvisory

The Last Thing Good Ideas Need Is Government "Investment": Solyndra

Solyndra for Dummies

I consider it almost a patriotic duty to ensure that the Solyndra scandal gets lots of coverage. It is a classic case of what can happen when politicians (of any stripe) and politically-correct enthusiasts (e.g., the green lobby) figure out ways to tap the public purse to fund their favorite initiatives. Industrial policy (of all kinds) is about the only sure way to ensure that taxpayer's money is wasted, often at the expense of more promising but less PC ventures. Be sure to see the four related cartoons here. HT: Glenn Reynolds

I believe strongly that any good idea worth its salt will have no trouble locating funding. As the late Jude Wanniski often argued, the supply of capital in the world is virtually unlimited if you have a good and profitable idea. Governments should never play the role of venture capitalist.

via scottgrannis.blogspot.com

Berk:  Figure I'll do my tiny part to help Scott Grannis publicize how badly government "invests', or directs capital.  Government simply cannot invest because it has the wrong incentives, objectives and competencies.

Government Intervention: It's Not What You Do It's What You Have the Courage to Undo.

The good news is that economic intervention does not a speech make.  The bad news is that a speech does nothing to clear up regime uncertainty.

“There have been endless analyses of individual economic policies; there has been little attention to changes in policy regimes.”—PETER TEMIN

Here's another excerpt from Higgs' essay on "Regime Uncertainty" during the great depression.

...economic historians only echo the observations of one of America’s leading investors, Lammot du Pont, in 1937:

Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate.  Are taxes to go higher, lower or stay where they are? We don’t know.  Is labor to be union or nonunion?… Are we to have inflation or deflation, more government spending or less?… Are new restrictionsto be placed on capital, new limits on profits?… It is impossibleto even guess at the answers. (quoted in Krooss 1970, 200)

Business confidence "rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights."

The President makes a not-ready-for-prime-time speech in front of some of the members of Congress (see here) to setup his campaign that will try to make it the Republicans' fault that unemployment is so high.   That ship has sailed,  Mr. President.  

It's now about the reduction of regime uncertainty.  The more his campaign gimmicks fail, the more he will order his regulatory army of bureaucrats to stand down, as he did on Friday when he abandoned a proposed Environmental Protection Agency (EPA) rule tightening air-quality standards.  

I also just heard that the President will push "public investments".  This is a joke.  It's  not public spending that is suffering.  It's private investment that needs to be sparked - the supply side of the economy...after all, that's what jobs are - the supply of productive capacity.

The government doesn't jump start private investment; it simply changes the regime in which private actors make investment decisions.  This is what the Democrats, Socialists and Keynesians miss.  It's not targeted government action that saves the day.  It's the changing of the regime that changes private investment.

The branches of government can either make the environment (or the regime) of rules,  regulations and laws more certain or less.  Private investment spending is an indication of how well the private sector is responding to a current regime.

The Democrats in Congress since 2006 along with the technocrat academics in the White House changed the regime for good in 2008, and the private sector froze and then moved capital into non-productive assets like commodities and cash, which contimues today.  The graph below shows private investment operating in the operating regimes (2001 - 2006, the Republican Congress and President) and (2006-2010, the Democratic Congress and President).  Notice how private investment stagnated after ObamaCare unceremoniously passed in the Spring of 2010.  And notice the recent slight bump back up after the historical 2010 mid-term elections - the regime is changing - for the better.  As Obama sees his hopes of re-election fade we will see his dismantling of the regulatory nightmare, that he and Congressional allies have erected, accelerate.

The first shot was the abandonment of the new EPA rules on air quality.  Notice the important word here is "new".  It's the change that hinders investment and recovery.  The government's job is to create a regime - rules of the game - that are fair in that everyone knows that the rule will be fairly applied and that the cost of the rule will be known in advance and will not change.  The greatest regime uncertainty in my lifetime existed under Obama's first 2.5 years, and it seems that it's the worst regime uncertainty since the Great Stagnation after the Great Collapse of the Great Depression. 

 
Here's how Robert Higgs describes this idea of "Regime Uncertainty" and it's negative correlation with private investment and sustainable economic growth. 

To narrow the concept of business confidence, I adopt the interpretation that business people may be more or less “uncertain about the regime,” by which I mean, distressed that investors’ private property rights in their capital and the income it yields will be attenuated further by government action. Such attenuations can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property.  Many intermediate threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. In any event, the security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens,  presumptive rights.

Buy backs no brainer - near zero cost of cash till 2013?

Expect more and more as the Fed has just given the green light until 2013, low yielding cash on the balance sheet with nowhere to go in the regular business will be used to buy back stock - that will boost earnings per share growth - some snobs don't like that kind of growth, but I am happy to own a greater share of slow growing profits without ponying up more dough.

August 17 (Bloomberg) U.S. companies are authorizing share repurchase plans at a rate that may make 2011 the third-biggest year for buybacks since at least 1985, Rob Leiphart, an analyst at Westport, Connecticut-based research firm Birinyi Associates Inc., wrote in a note Aug. 11. There were $36 billion in repurchases approved last month, bringing the total this year to $324 billion through July 31. If that rate holds up, 2011 would end with $554 billion, he projected. Only 2006 and 2007 had more, with $655 billion and $863 billion, respectively, Birinyi data show.

Sowell: No. Income inequality has not grown like the Progressives say.

Here's the Facts: Obama's and Democrat's Policies Saddled Us With The Debt

I just heard Dennis Kucinich use the tired old line that the reason why we have so much debt is because of George Bush's two wars that were not paid for, a prescription drug plan that was not paid for and those dreaded Bush tax cuts for the rich, the poor and everyone else in between.

This is the typical "not my fault" excuse by unaccountable intellectual experts that just can't fathom that the real world does not conform to their version of utopia that exists only in their minds. Of course, the problem is that when their theories and grand designs don't work out in the seminar room and/or in their papers submitted to some social science journal there are no real world consequences.  Unfortunately, the pinheads that are making economic and social policy for us since 2008 and really since 2006 if you think about it, have created a humongous mess from which we are just beginning to crawl out of now.

No sane person could blame Bush for the huge accumulated debt.

Don't be fooled by the slick graph shown below. It appeared in the New York Times and is the new touchstone for the Democrats' feeble attempt to blame the moribund economy on Bush and the Republicans.  

They think that if they outline how much an action was supposed to have cost - how do they know what the Bush tax cuts cost anyway?, they don't and can't - without giving you the context or the actual amount of tax revenue that actually came in during that period of economic growth.   They want you to falsely think that it had to be George Bush's fault.  As my nine-year-old daughter would say – so typical, so random, so stupid.

That's right, revenues were increasing and the budget deficit was  shrinking after those famed Bush tax cuts.   The truth is that noone can tell you exactly which tax was raised to pay for the two wars and the Medicare prescription drug plan, but I can tell you that the budget deficit was shrinking until the Pelosi Congress got elected in 2006 - that was our first mistake.  

Before I go here's another post that explodes one of the other Democrat talking points.

And then 2008 and the deficit explodes.  As  Tyler Durden said on 07/30/2011: 

Even as the political posturing over who spent what, how much and when reaches ridiculous levels, courtesy of the St. Louis Fed it is a short 5 minute process to fact check (thanks to the St Louis Fed's Fred) what the average annual federal expenditures, investment and consumption were/are under the regimes of Bush and Obama respectively. It also allows us to see what the average government saving, or rather, borrowing has been under the two administrations. The result, or rather the step function contained therein, may surprise some. Furthermore, we present a few observations from Sean Corrigan's latest later on the proclivity of the Obama administration to spend.... and spend... and spend... which demonstrates that while there certainly may be carryover from the previous administration, the eagerness of the current one to fund a record amount of disposable income via state transfer funding can not be blamed on the Bush by any sane person.

Steve Wynn: "This administration is the greatest wet blanket to business, progress and job creation in my lifetime." #tcot #Obama

$1 million invested with Steve Wynn in 1973 would be worth $3.6 billion today.

Remember the above headline when you read the following excerpt from Wynn Resorts' Q2 2011
conference call this evening.  Steve Wynn knows how to  make money, create jobs and invest in real assets.

He was asked on the call by Bill Lerner from Union Gaming about expanding in Las Vegas.  Steve Wynn's reply:  No way until Obama radically changes or is out.  

Check it out: (the highlights are mine)

Well, here's our problem. There are a host of opportunities for expansion in Las Vegas, a host of opportunities to create tens of thousands of jobs in Las Vegas.  I know that I could do 10,000 more myself, and according to the Chamber of Commerce and the visitors and convention bureau, if we hired 10,000 employees, it would create another 20,000 additional jobs for a grand total of 30,000.

I believe in Las Vegas, I think its best days are ahead of it, but I'm afraid to do anything in the current political environment in the United States.  You watch television and see what's going on on this this debt ceiling issue, and what I consider to be a total lack of leadership from the President, and nothing is going to get fixed until the President himself steps up and wrangles both parties in Congress.

Wynn directly blames Obama for 30,000 jobs that are not getting created in Las Vegas - just from him.  Then he goes on to show how everybody in business is "afraid" of the Socialists in charge of the U.S.  government:

But everybody is so political, so focused on holding their job for the next year that the discussion in Washington is nauseating.  And I'm saying it bluntly that this administration is the greatest wet blanket to business and progress and job creation in my lifetime.

And I can prove it and I could spend the next three hours giving you examples of all of usin this marketplace that are frightened to death about all the new regulations, our health care costs escalate, regulations coming from left and right, a President that seems, you know – that keeps using that word redistribution. Well, my customers and the companies that provide the vitality for the hospitality and restaurant industry, in the United States ofAmerica, they're frightened of this administration.

He goes on to explain it is only natural that there is so much money on the sidelines:

And it makes you slow down and not invest your money. Everybody complains about how much money is on the side in America. You bet. And until we change the tempo and the conversation from Washington, it's not going to change. And those of us who have business opportunities and the capital to do it, are going to sit in fear of the President.  And you know, a lot of people don't want to say that. They say "oh, God, don't be attacking Obama." Well, this is Obama's deal. And it's Obama that's responsible for this fear in America. The guy keeps making speeches about redistribution,and maybe we ought to do something to businesses that don't invest, they're holding too much money.

You know, we haven't heard that kind of talk except from pure socialists. Everybody is afraid of the government. And there's no need – there's no need, you know, soft pedaling it.  It's the truth.  It is the truth.  And that's true of Democratic businessmen and Republican businessmen, and I am a Democratic businessman and a – I support Harry Reid, I support Democrats and Republicans, and I'm telling you that the business community in this country is frightened to death of the weird political philosophy of the President of the United States.  And until he's gone, everybody is going to be sitting on their thumbs.

I believe that he's right.

...And if the Middle Class' incomes have grown as much as the Rich's? What then? #tcot, #askobama

In October last year I wrote this post about "income inequality" - the moral case that the Obamacrats have been using to tax the rich and redistribute resources to those they deem more needy.  Now that we are hearing more nonsense about income inequality during the current debt ceiling debate, it is time to reexamine the issue.

I wrote then that the reason we are in this mess is the radical view of the Obama administration and its allies in Congress that the American system is unfair and has been dominated by rich greedy plutocrats who put in policies that caused incomes to stagnate after the Reagan supply-side revolution.

"ObamaCare", "Cap and Trade",  "Stimulus" and "Tax the Rich" have been the current Democratic government's grand schemes to solve one perceived problem - rising income inequality.  The story goes that the Republicans gave tax breaks to the rich, left out the middle class and voila! - a widening income gap.

How scary, terrible, unfair - - - and demonstrably false.  

Just last month, the group United for a Fair Economy - a group dedicated to letting most voters know that the outcome, which United defines as intolerable - rising income inequality - is caused by Republican Supplyside rich greedy policies.

 From Politifact:

The graphic was produced by the group United for a Fair Economy, a group that "raises awareness that concentrated wealth and power undermine the economy, corrupt democracy, deepen the racial divide, and tear communities apart." 

The group’s chart represents the growth in income for various income groupings as flowers, with
the height of the flower proportionate to the size of the increase. The text says, "Comparing the growth of U.S. family incomes. 1947-1979 we grew together. 1979-2008 we grew apart."

Poltifact notes that the graphic is not entirely accurate because it excludes fringe benefits like healthcare benefits but basically it is right. 

No it's not right at all...it also omits transfer payments and taxes or lack thereof for 40% or so of the households - it does not take into account after-tax income, the policies that are in place that in fact make the income growth more "fair".

Here's the problem with their problem:

1. It ignores the fact that all statistical categories earned much more real income over those same years - real growth where the tide did in fact lift all boats. 

2. The above chart measures "household" income statistical categories, not per capita income.  It turns out that throughout the thirty years, households contained more working people per household at the top and more single earning households in the bottom statistical categories.  Naturally household income goes up when there are more people earning incomes in the household - but that has nothing to do "fairness" or systematic screwing of the middle class by the Republican fat cats.

3.  These are statistical categories, not flesh and blood human beings.  Very rarely - only 1% of the time in fact - do people who start in the lower categories not enter higher categories as they get more experience and more education and more skills.  That is, there is no evidence that actual people are any less upwardly mobile today as they were thrity years ago.

Here's a video Thomas Sowell explaining the lie that is this income growth inequality:

And today this new paper reported on the Carpe Diem blog:

 

It’s a familiar and frequently-told narrative that middle-class incomes have stagnated over the last several generations while the upper-income groups have gotten richer.  President Obama has promoted this narrative by claiming in 2009 that  “For many years, middle class Americans have been working harder, yet not enjoying their fair share of the fruits of a growing economy."

But a new working paper titled “A "Second Opinion" on the Economic Health of the American Middle Class” by NBER and Cornell researchers provides new evidence that the popular narrative is largely mistaken.  By taking into account previously unmeasured shifts in household size and the tax units in them, taxes paid, transfer payments received, and the increasing importance of fringe benefits, the researchers find that the growth in after-tax household income has been substantial not only for the middle class, but for all income groups over the last 30 years.

 

Buffett on the importance of buying ValueAligned companies

This “what-will-they-do-with-the-money” factor he calls it.  Some call it the "management quality" factor.  We call it the ValueAligned factor.  Companies that use EVA and Value-Based Management or a sytem like it are much more likely to create $2.00 out of each $1.00 of retained earnings than $0.50 out of each $1.00. 

There is a third, more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future. We, as well as many other businesses, are likely to retain earnings over the next decade that will equal, or even exceed, the capital we presently employ. Some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.

This “what-will-they-do-with-the-money” factor must always be evaluated along with the “what-do-we-have-now” calculation in order for us, or anybody, to arrive at a sensible estimate of a company’s intrinsic value. That’s because an outside investor stands by helplessly as management reinvests his share of the company’s earnings. If a CEO can be expected to do this job well, the reinvestment prospects add to the company’s current value; if the CEO’s talents or motives are suspect, today’s value must be discounted. The difference in outcome can be huge. A dollar of then-value in the hands of Sears Roebuck’s or Montgomery Ward’s CEOs in the late 1960s had a far different destiny than did a dollar entrusted to Sam Walton.

Why "Gov. Walker is the better friend of the union manufacturing worker in Oshkosh than is Mr. Trumka."

Americans everywhere and of all persuasions should rally behind Governor Walker.  Yes, all Americans should support unions.  After-all "free association" is an American value. 

But collective bargaining for public sector employees is not an American value.  In fact, it corrodes democratic values by incentivizing politicians to bargain against the tax payers' interests - tax payers are us, the citizens.  The monopoly power inferred by collective bargaining for public unions neuters the power of the vote.  Also, the private union worker gets killed in this arrangement as private taxes go up; citizens move out of jurisdictions; and businesses flounder.  Read this from the Wall Street Journal today:

Why? Because unlike in the private economy, a public union has a natural monopoly over government services. An industrial union will fight for a greater share of corporate profits, but it also knows that a business must make profits or it will move or shut down. The union chief for teachers, transit workers or firemen knows that the city is not going to close the schools, buses or firehouses.

This monopoly power, in turn, gives public unions inordinate sway over elected officials. The money they collect from member dues helps to elect politicians who are then supposed to represent the taxpayers during the next round of collective bargaining. In effect union representatives sit on both sides of the bargaining table, with no one sitting in for taxpayers. In 2006 in New Jersey, this led to the preposterous episode in which Governor Jon Corzine addressed a Trenton rally of thousands of public workers and shouted, "We will fight for a fair contract." He was promising to fight himself.

Thus the collision course with taxpayers. Public unions depend entirely on tax revenues to fund their pay and benefits. They thus have every incentive to elect politicians who favor higher taxes and more government spending. The great expansion of state and local spending followed the rise of public unions.

Current AFL-CIO chief Rich Trumka has tried to portray Wisconsin Governor Scott Walker's reforms as an attack on all unions, but they clearly are not. If anything, by reining in public union power, Mr. Walker is trying to protect private workers of all stripes from the tax increases that will eventually have to finance larger government. Regarding public finances, the interests of public union workers and those of private union taxpayers are in direct conflict. Mr. Walker is the better friend of the union manufacturing worker in Oshkosh than is Mr. Trumka.

via online.wsj.com