How Free Is America's Economy?

From No Sheeples Here:



A few posts ago, I surveyed the state of our economy, considering food, agriculture, energy, housing trade deficits and more. Bottom line, we are moving quickly in the wrong direction across the entire spectrum. The American Dream is not yet dead, but it will soon be on life support if entitlements are not reformed and the insane Obama war on oil, coal and gas is not turned completely around.

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2011: The State Of The Union Economy

In the near future, Obama will be giving his State of the Union address. Here are some deeply troubling facts about our economy that you will not be hearing in that speech.

1. Food Prices At Record Highs & Heading Upwards; Ethanol Mandates & Subsidies Put Fuel In Competition With Food

Food prices are skyrocketing upward, running last month at an annualized rate of 8.7% inflation.

In December, the wholesale price of vegetables rose by 22.8 percent, and fruit was up 15.4 percent. . . . The price of beef rose 2.7 percent in December and was 15 percent higher than a year ago, the Department of Labor said in the PPI report. Pork is up 22.3 percent from a year ago, and fish is up almost as much. Turkey is up 18 percent.

This is a world wide issue. Food prices are at their highest ever. Just today, the chief executive of one of the world's largest food producers warned that the global crisis in food production is reaching "dangerous territory" with demand outstripping supply.

The causes are multiple, but a large portion of it is the insane push to create "bio-fuels" out of food crops and the concomitant misuse of agricultural land:

In the United States, which harvested 416 million tons of grain in 2009, 119 million tons went to ethanol distilleries to produce fuel for cars. That’s enough to feed 350 million people for a year. The massive U.S. investment in ethanol distilleries sets the stage for direct competition between cars and people for the world grain harvest. In Europe, where much of the auto fleet runs on diesel fuel, there is growing demand for plant-based diesel oil, principally from rapeseed and palm oil. This demand for oil-bearing crops is not only reducing the land available to produce food crops in Europe, it is also driving the clearing of rainforests in Indonesia and Malaysia for palm oil plantations.

Bio-fuels are the world's greatest boondoggle. The fuel is inefficient, expensive and actually contributes to the growth of CO2 in our atmosphere. Not only does it make no sense to mandate or subsidize ethanol, it is a major contributing factor to poverty and hunger world-wide. Yet it is now a vested interest and thus, seemingly impossible to dislodge.

This particular problem in America has bi-partisan origins. It began under the Bush administration and now being furthered by the Obama administration. Within the past months, Obama's EPA actually increased by 50% the amount of ethanol allowable in gasoline, from 10% to 15% ethanol. Between that and the recent renewal of the ethanol subsidy, this problem of food prices will only get worse.

2. Housing Market

Our housing market has crossed the threshold into uncharted territory - it is now worse than it was during the Great Depression. Home values have declined 26% since their 2006 peak and there is no end in site to the slide. Foreclosures this year are expected to top 2010's record of one million, and over five million people are over two months behind in their mortgage payments.

3. Obama's War On Domestic Oil & Gas

It is impossible to underestimate the cost to our economy of Obama's war on domestic production of oil. An incredible 62% of our entire trade deficit now comes from importing foreign oil.


And the situation is poised to become much worse. Many expect the price of gasoline seems to spiral upwards, beyond the $4 a gallon threshold that caused nationwide discontent two years ago. Gas could well hit $5 a gallon this year. Opening up oil and gas drilling throughout America would add significantly to jobs, fill our declining coffers and significantly increase the supply of oil and gas, thus reducing the cost of gasoline. Yet the Obama administration is taking the opposite tack, warring on our oil and gas infrastructure.

The administration, has shut down all new offshore drilling and is making it ever more difficult to drill for oil on federal lands. Further, the Obama administration is in the midst of massive land and ocean grabs specifically aimed at cutting off ever more of our natural resources from exploitation. Lastly, the administration is expected to introduce even more regulations and increase taxes on our domestic oil industry in response to the report of the deeply partisan Oil Spill Commission, which, while tasked with investigating BP, instead condemned the entire oil industry.

4. Obama Is Killing Coal Mining & The Use Of Coal For Electricity With Deep Ramifications In The Future For The Cost & Availability Of Energy In America

The war on oil and gas pales in comparison to the Obama administration's war on coal - the basis for over 50% of the electrical power generation in our country. The Obama administration is doing all that it can to completely kill our coal industry:

"Coal is a dead man walkin'," says Kevin Parker, global head of asset management and a member of the executive committee at Deutsche Bank. "Banks won't finance them. Insurance companies won't insure them. The EPA is coming after them. . . . And the economics to make it clean don't work." . . .

Not a single new coal power generation plant was built in 2010. And lest there be any question whether investors should put their money into coal mines, the EPA recently took the unprecedented step of withdrawing a Clean Water permit for a mine it had approved three years ago. This from the WSJ, via Bizzy Blog:

The Environmental Protection Agency, in an unusual move, revoked a key permit for one of the largest proposed mountaintop-removal coal-mining projects in Appalachia, drawing cheers from environmentalists and protests from business groups worried their projects could be next.

The decision to revoke the permit for Arch Coal Inc.’s Spruce Mine No. 1 in West Virginia’s rural Logan County marks the first time the EPA has withdrawn a water permit for a mining project that had previously been issued. . . .

A spokeswoman for Arch said the company was “shocked and dismayed” by the agency’s decision, which it said would block an additional $250 million investment that would create 250 jobs. The company said it would appeal to the courts.

… As the EPA stressed that the permit decision had no implications beyond the Spruce mine, business groups outside the coal industry said the government’s action raised questions about whether permits previously issued for other businesses could also be revoked, potentially stranding investments and costing jobs even as the economy continues to heal.

The EPA has just added a significant amount of risk for any investor considering investment in a coal mine. This is killing jobs in the oil and coal industries. This war on coal and oil will soon have major ramifications for the domestic cost and availability of energy.

Update: Obama conducts this war even though his push for "green energy" is falling utterly flat. American Thinker covers the moras Obama has created with solar energy - a black hole for tax dollars and Democratic corruption that will not be replacing coal in our lifetime, if ever.

5. The EPA Poised To Harm Our Economy

Regulation as a whole has been creating an anti-business momentum for decades. But under Obama, and in particular with the EPA, the regulatory bureaucracy has taken wing. While Congress has refused to legislate restrictions on CO2, the EPA, with an assist from the climate scientists sitting on the Supreme Court, has assumed the right to do so under the Clean Air Act, a law ill suited for the task. The first leg of EPA's new regulatory scheme for CO2 went into effect this month. It is initially aimed at the "largest emitters" - i.e., coal fired power plants, cement plants, etc.



It is expected that this power grab will EPA will cost our country a million jobs and drive up significantly the price of energy.

6. Environmental Groups & The Courts Driving Energy Policy

Unfortunately, it is not just the regulatory bureaucracy that is implicated in this ever greater assault on our economy. Each of the regulatory laws passed by Congress decades ago contain a provision giving the keys to the courthouse to environmentalists. Because of that, a major driver of our nation's environmental policy is being dictated by the Courts - with drastic consequences. For example, a Federal Court decision to protect the Delta Smelt has turned one of our nation's prime agricultural areas into "Zimbawbwe." For another example, enterprising lawyers are now filing nuisance suits to sue U.S. manufacturers and power plants for their contribution to global warming. Our Supreme Court recently opted to allow such cases to proceed. It is time for Congress to end standing for all private suits under our environmental laws as well as clarifying that the regulation of green house gasses are policy questions for our elected representatives and thus cannot be heard by state or federal Courts.

7. More Regulatory Overreach & The Looming Explosion In Regulations

Before leaving the question of the regulatory bureaucracy, it is of course not just the EPA that has engaged in power grabs of very dubious constitutionality. The FCC's recent decision to assume control over regulation of the internet is yet another shining example of regulatory agencies gone wild. And we see similar overreach by HHS as Kathleen Sebilius is in the process of taking control over health insurance pricing in the U.S. Meanwhile, hundreds of new bureaucracies remain to be staffed and reams of new regulations remain to be written for Obamacare and the Financial Regulatory bill.

The regulatory bureaucracy is clearly out of control, bastardizing our form of government. We are beginning to resemble the EU - a government run by unelected bureaucrats. That is far from the vision of our Founders. As George Will notes in a column today, reasserting Congressional authority and oversight over the regulatory bureaucracy should be at the top of the agenda for the 112th Congress. Indeed, I believe that Congress should immediately pass a law holding that no regulation will become binding and enforcable unless and until approved by Congress.

8. Obamacare's Looming Taxes & Costs

As to Obamacare, its first effects are just now being felt. What we as a nation have to look forward to in the offing - higher health insurance premiums as well as hundreds of billions in new taxes, all on top of the costs of compliance:

- Excise Tax on Charitable Hospitals (2010)
- Tax on Innovator Drug Companies (2010)
- Tax on Indoor Tanning Services (2010)
- Medicine Cabinet Tax (Jan 2011)
- HSA Withdrawal Tax Hike (Jan 2011)
- Corporate 1099-MISC Information Reporting (Jan 2012):
- Surtax on Investment Income (Jan. 2013)
- Flexible Spending Account Cap aka “Special Needs Kids Tax” (Jan 2013)
- Hike in Medicare Payroll Tax (Jan 2013)
- Tax on Medical Device Manufacturers (Jan 2013)
- Raise "Haircut" for Medical Itemized Deduction from 7.5% to 10% of AGI (Jan. 2013)
- Elimination of tax deduction for employer-provided retirement Rx drug coverage in coordination with Medicare Part D (Jan 2013)
- $500,000 Annual Executive Compensation Limit for Health Insurance Executives (Jan 2013)
- Individual Mandate Excise Tax (Jan 2014)
- Employer Mandate Tax (Jan 2014)
- Tax on Health Insurers (Jan 2014)
- Excise Tax on Comprehensive Health Insurance Plans (Jan 2018)

9. The National Debt & The Road To Becoming A Banana Republic

Our national debt is expected to balloon over the next decade, particularly in light of massive entitlement obligations. Obama and the left have us on track to have debt rise to $20 trillion, 90% of GDP, by 2020, the consequences of which will be calamitous. It means we will soon be facing massive increase in taxes, inflation, and the need for draconian cuts in spending - or default on our sovereign debt, with unimaginable consequences not just for us, but also for the world economy.

10. Unemployment

Since Obama assumed the Presidency, we have hemorrhaged millions of jobs and remain mired above 9% unemployment. For two years, Obama has concentrated on everything but the economy and jobs for Americans, apparently assuming that the economy would bounce back of its own accord while he focused on paying off labor unions and forcing through Obamacare. We are world's away from the Bush years, during which unemployment averaged 5.2%.

The December unemployment report showed that the jobless number dropped to 9.4%. That seemingly small piece of good news is illusory. This from Morning Bell via Bizzyblog:

You are going to hear a lot of noise from the White House about how this drop from a 9.8% unemployment rate to 9.4% means the economy is in a strong recovery. This is false. The reality is that the only reason the unemployment rate dropped is because the U.S. labor force decreased by 434,000. More importantly 260,000 Americans dropped out of the labor force entirely. This means that the Obama economy is now driving Americans out of the labor force faster than it is bringing them in.

Unemployment will remain an intractable problem under this deeply incompetent administration. Indeed, it will take a major change to all of the conditions dicussed above if we are to turn our country around, lower unemployment and grow our way out of this fiscal crisis.

11. Conclusion

Obama inherited a bad economy that he has made worse. Instead of changing tack, he is on the cusp of making our economy infinitely worse. True, he has finally appointed a token capitalist with business experience to his administration - William Daley. But unless this means Obama is willing to do an economic u-turn on gas, oil, Obamacare, the EPA, the FCC, ethanol and deficit spending, nothing is going to pull us out of our downward trajectory between now and 2012. The best we can hope for is for the House to slow the slide. But don't expect to hear any of that at the State of the Union.

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Outrageous & Depressing Economic News

Accross the nation, public sector union workers in the states are making on average 25% more than their private sector counterparts. And perhaps the most lucrative place to be today is as a federal government employee. This from the USA Today:

At a time when workers' pay and benefits have stagnated, federal employees' average compensation has grown to more than double what private sector workers earn, a USA TODAY analysis finds.

Federal workers have been awarded bigger average pay and benefit increases than private employees for nine years in a row. The compensation gap between federal and private workers has doubled in the past decade.

Federal civil servants earned average pay and benefits of $123,049 in 2009 while private workers made $61,051 in total compensation, according to the Bureau of Economic Analysis.

In fairness, TNR makes the point that, when you adjust for variables such as education, then the gap closes. As to how much it closes, who knows, but the raw numbers themselves are damning. But regardless, we have seen a vast expansion of government workers at all levels, and particularly of federal government workers under Obama - with the number now cresting 2.15 million. The simple fact is that none of these people create a dollar for our economy. It is only the private sector that creates the wealth of America. And when we expand the federal government work force ever more, we are both shrinking the size of the pool of private sector employees and shrinking our tax base.

And then, of course, there are the retirement issues, where the confluence of public sector unions and scurrilous politicians who have underfunded pension committments have helped bring our nation to the brink of catastrophe. As the NYT noted:

Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.

So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap? . . .

Who indeed? As it stands now, public sector unions are determined to soak American taxpayers for every possible dollar. And, as we have recently seen with an act of Grand Theft Democrat, our federal government is fully complicit in the corruption.

I think it clear that the one lesson to come out of all of this is that we need to tighten the laws significantly for funding defined benefit pension plans, particularly for the public sector and unions. Moreover, there should be a real push to move from defined benefit pension plans in the public sector and into 401k plans. The simple fact is that, if our economy can't sustain enough growth to allow for reasonable retirement on defined contribution plans, then we will be funding defined benefit plans either by printing dollars by the bushelload, thus leading to significant inflation, or by taxing the private sector to the point of killing the golden goose. We will further have a generation of Americans on the verge of revolution - and starvation.

The same concepts apply to Social Security - a program that has been run as a Ponzi scheme for decades. People who have paid into social secuirty all of their life will perhaps be surprised to find that the money they paid in went out the door upon as soon as our government got its greedy paws on it. This provides the double whammy - the bill has now come due on this Ponzi scheme, with outlays already in excess of annual inflow from taxes. Social Security is also a defined benefit plan, so that if you make promises while at the same time destroying our economy - well, its off to the printing presses. And the left demagogoues the issue of social security, wanting to sustain the unsustainable. Just amazing.

But even on the 401k front, the news looks bad indeed. Megan McArdle at the Atlantic has a depressing article, arguing that stocks are significantly overvalued today and we will likely see substanitally less growth in the stock market over the coming decade.

If the return on equities really has fallen, this decline poses a big problem for the average investor who planned to stick 5 to 10 percent of his or her annual income into stock funds and retire comfortably. At an annual inflation-adjusted growth rate of 8 percent, savings of just 5 percent of your income for 30 years will leave you with a nest egg big enough to replace almost half your income when you retire. Saving 10 percent will make you really comfortable.

But if the return is 2 to 3 percent, you’ll need to save close to 40 percent to replace almost half of your income. And a 2 percent return seems to be a real possibility—in fact, it’s a hair above the 1.8 percent that Smithers & Co., an asset-allocation consultancy, forecast for U.S. equities over the next decade.

Felix Salmon, a finance blogger, argues that with stocks showing both lackluster prospects and whiplash-inducing price swings, investors might want to get out of the market entirely. That conclusion is tempting: if a quarter of Americans are expecting bubble-grade growth in stock prices, mightn’t another correction be in the offing? . . .

Even more depressing is the assessment of Keith R. McCullough, CEO of the research firm Hedgeye. This from Mr. McCullough writing in Fortune magazine:

. . . Despite the many differences between Japan and the US, there is one similarity that continues to matter most in the risk management model my colleagues and I use at Hedgeye, our research firm -- debt as a percentage of GDP. Now that the US can't cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing -- buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It's a point from which it's almost impossible to return.

On July 2nd, we cut both our third quarter 2010 and full year 2011 GDP estimates for the US to 1.7%. At the time, the consensus around US economic growth estimates was about 3%. Now we're starting to see both big brokerage analysts and the Federal Reserve gradually cut their GDP estimates, but not by enough. Even our estimate for 2011 is still too high. . . .

With 40.8 million Americans on food stamps (record high) and 45% of the unemployed having been seeking employment for 27 weeks or more (record high), what's left if (or when) QE2 doesn't kick start GDP growth? Should we start begging for QE3? Should we cancel the bomb of the National Association of Realtors' existing home sales report, scheduled for public release on August 24th? Or should we bite the bullet and accept that current economic policy dictates 0% returns-on-savings, even as Washington continues to lever-up our future to the point of economic collapse?

Before the Fiat Fools -- Hedgeye's name for political actors and bankers who have placed their hopes of economic recovery in printing endless supplies of new cash -- run out campaigning for QE3, maybe they should analyze some real time market results to yesterday's announcement of QE2:

1)The US dollar is battling for resuscitation after 9 consecutive down weeks -- down 9% since June.

2) US Treasury yields are making record lows on the short end of the curve, with 2-year yields striking 0.49%.

3) The yield spread (in this case the difference in return between 10-year and 2-year Treasury bills, which shows a long-term confidence when high) continues to collapse, down another 4 basis point day-over-day to 223 basis points.

4) The S&P 500 is down below its 200-day moving average (a common signpost for the health of a market or stock) of 1115.

5) US Volatility (VIX) is spiking from its recent stability.

6) In Japan, long time quantitative easing specialists found their markets closing down overnight by 2.7%, which makes them down 11.9% for the year to date.

Lest our doom and gloom seem built entirely on technical measurements, what they boil down to is actually quite simple -- an idea about our country which dates back to 1835. Alexis De Tocqueville, author of Democracy in America, which was published that year, seemed to warn of this day when he wrote: "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

And yet Obama, still refusing to admit that his Keynesian policies are now proven failures, continues to mount up our debt at an unheard of pace. This from the WSJ:

The U.S. government spent itself deeper into the red last month, paying nearly $20 billion in interest on debt and an additional $9.8 billion to help unemployed Americans.

Federal spending eclipsed revenue for the 22nd straight time, the Treasury Department said Wednesday. The $165.04 billion deficit, while a bit smaller than the $169.5 billion shortfall expected by economists polled by Dow Jones Newswires, was the second highest for the month on record. . . .

Years of deficit spending by Washington have led to a mounting national debt. Interest payments so far in fiscal 2010 amount to $185.25 billion; by contrast, corporate taxes collected by the government during the same 10 months were $139.71 billion. Interest payments in July alone were $19.9 billion.

And if that wasn't bad enough for you:

The Commerce Department reported Wednesday that the U.S. trade gap had hit its highest level since October 2008. Exports declined and imports increased to a record high as the trade deficit expanded to $49.9 billion, an 18.8 percent increase in June compared to May. Imports grew 3 percent while exports dropped 1.3 percent, the most since April 2009, the Commerce Department reported Wednesday.

We are a nation sinking under the weight of an entitlement system out of control and an utterly profligate administration more incompetent than that of Herbert Hoover.

So what is the administration doing about all of this? The great class warriors of the left, with Obama leading the way, are intent on letting the Bush tax cuts expire, regardless of the effect on the economy:

Republicans accuse Democrats of plotting one of the biggest tax hikes in American history, arguing that raising taxes on wealthy households would punish the very people capable of creating jobs, spurring economic growth and reducing the 9.5 percent unemployment rate. About half of all small-business income is reported on the individual returns of people making over $250,000 a year, according to the taxation committee's data, though those taxpayers represent only about 3 percent of small businesses.

Meanwhile, in the face of all of this, John Kerry, the man who was last seen skipping out on his state taxes, is still pushing to saddle our near dead economy with cap and trade legislation. Well, that really would be the final nail in our economic coffin if they were ever able to get it through. Though, that said, the EPA is already starting to impose carbon regulations - based on the ruling of the Supreme Court, not any action by our legislature. Consider it regulation without representation.

At any rate, there is at least one bright spot in this otherwise day of very depressing economic news. Obama, still on his "recovery summer" promotion tour, announced the other day that the "worst of the recession" is over. Don't you feel better knowing that. Nothing to see here, move on.

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