Tag: economy

Sweet, and Yet Very, Very Sour

sugarMy colleagues have blogged before about the recent sugar “market” woes. There was some hope that the USDA, which manages sugar imports very carefully to maintain U.S. prices up to three times higher than world prices, would relax the sugar quotas this year and give sugar users some well-deserved and long overdue relief.

Alas, it was not to be. According to Congress Daily, the USDA announced today [$] that there would be no increase in the import quota for the time being, and that their models saw no cause for alarm because of predicted increases in domestic production and Mexican imports (allowed special import status through NAFTA). And who cares about sugar users’ concerns when you have models?

The American Sugar Alliance says (sigh) that the announcement “makes perfect sense. Supplies are adequate and will soon be building. If any tightness were to emerge, it would not be until next summer. USDA will have adequate time next spring to boost supplies.”

Do you hear that, sugar consumers of America? The USDA is on the case. Now, I’ve got nothing personally against the folks at USDA. I know many of them personally and they are fine people, and smart economists, who are just following congressional orders. But, really, are we still, in 2009, in an at least nominally market-oriented economy, seriously attempting to micro-manage supply and demand of commodities?

One last point from the Congress Daily story (which requires a subscription to read this far):

Last August, the Bush administration adjusted the tariff rate quota to allow an additional 300,000 short tons of sugar to enter the country…[American Sugar Alliance Economist Jack Roney] said the additional sugar … caused raw cane sugar prices to plummet from 23 cents per pound to 19 cents per pound. (emphasis added)

In November 2008, when U.S. raw sugar prices were 19.83 cents per pound, world prices were 12.87 cents per pound. Even allowing for the fact that domestic prices indeed fell quite a lot, on what planet does Mr Roney consider a domestic price over 50 percent above an (unusually elevated) world price to be a “plummet”? Is whether we are paying a lot more – rather than a lot, lot more – really the standard we are aiming for here?

To be sure, world sugar prices are high right now, at least by historical standards. (The average world raw sugar price last fiscal year was 13.67 cents per pound. Last quarter the average world raw sugar price was 16.09 cents per pound. See here for all my price data) But even if they fall back to to historically average levels, Big Sugar wants to keep domestic prices high, and to prevent Americans from having access to cheaper sugar, forevermore.

It really leaves a bitter taste in one’s mouth.

The Pay Czar at Work

Mark Calabria notes how the form of salary scheme at financial institutions played no apparent role in sparking the financial crisis.  But that hasn’t stopped the federal pay czar from boasting about his power, even to regulate compensation set before he took office.

Reports the Martha’s Vineyard Times:

Speaking to a packed house in West Tisbury Sunday night, Kenneth Feinberg rejected the title of “compensation czar,” but he also said said his broad and “binding” authority over executive compensation includes not only the ability to trim 2009 compensation for some top executives but to change pay plans for second tier executives as well.

In addition, Mr. Feinberg said he has the authority to “claw back” money already paid to executives in the seven companies whose pay plans he will review.

And, he said that if companies had signed valid contractual pay agreements before February 11 this year, the legislation creating his “special master” office allowed him to ask that those contracts be renegotiated. If such a request were not honored, Mr. Feinberg explained that he could adjust pay in subsequent years to recapture overpayments that were legally beyond his reach in 2009.

This isn’t the first time that federal money has come with onerous conditions, of course.  But it provides yet another illustration of the perniciousness of today’s bail-out economy.

Co-ops: A ‘Public Option’ By Another Name

Politico reports that the so-called “public option” provision could be dropped from the highly controversial health care bill currently being debated throughout the country:

President Barack Obama and his top aides are signaling that they’re prepared to drop a government insurance option from a final health-reform deal if that’s what’s needed to strike a compromise on Obama’s top legislative priority…. Obama and his aides continue to emphasize having some competitor to private insurers, perhaps nonprofit insurance cooperatives, but they are using stronger language to downplay the importance that it be a government plan.

As I have said before, establishing health insurance co-operatives is a poor alternative to the public option plan. Opponents of a government takeover of the health care system should not be fooled.

Government-run health care is government-run health care no matter what you call it.

The health care “co-op” approach now embraced by the Obama administration will still give the federal government control over one-sixth of the U.S. economy, with a government-appointed board, taxpayer funding, and with bureaucrats setting premiums, benefits, and operating rules.

Plus, it won’t be a true co-op, like rural electrical co-ops or your local health-food store — owned and controlled by its workers and the people who use its services. Under the government plan, the members wouldn’t choose its officers — the president would.

The real issue has never been the “public option” on its own. The issue is whether the government will take over the U.S. health care system, controlling many of our most important, personal, and private decisions. Even without a public option, the bills in Congress would make Americans pay higher taxes and higher premiums, while government bureaucrats determine what insurance benefits they must have and, ultimately, what care they can receive.

Obamacare was a bad idea with an explicit “public option.” It is still a bad idea without one.

Tax Increases are Coming!

Over the weekend Treasury Secretary Timothy Geithner, who’s had a bit of trouble paying his own taxes, made it clear–in Washington-speak–that tax hikes are coming.  He appeared on air with George Stephanopoulos. 

Byron York of the Washington Examiner provides the transcript of the relevant Q&A:

STEPHANOPOULOS: Former deputy Treasury Secretary Roger Altman said it is no longer a matter of whether tax revenues should increase but how. Is he right?

GEITHNER: George, it is absolutely right and very important for everyone to understand we will not get this economy back on track, recovery will not be strong enough to sustain unless we can convince the American people that we’re going to have the will to bring these deficits down once recovery is firmly established. Remember we inherited a one point three trillion dollar deficit. The cumulative consequences of the policies this country pursued over the last 8 years left us with 6 million dollars of more debt than we would have had by making a bunch of commitments to cut taxes and add to spending without paying for those. We are not going to be able to afford to do that. And it is very important that people understand that. Our first priority now though is to get this economy back on track, make sure this financial system is repaired. Without that, we’re not going to get our deficits under control and the necessary path to fiscal responsibility, the necessary path to getting this country living within our means again is not just health care reform, to bring down those costs, but we’re going to a range of other things and that’s going to be a very difficult challenge for this country. We can do this, it just requires the will to act.

STEPHANOPOULOS: Including new revenues?

GEITHNER: Well, we’re going to have to look at – we’re going to have to do what’s necessary. Remember the critical thing is people understand that when we have recovery established, led by the private sector, then we have to bring these deficits down very dramatically. We have to bring them down to a level where the amount we’re borrowing from the world is stable at a reasonable level. And that’s going to require some very hard choices. And we’re going to have to do that in a way that does not add unfairly to the burdens that the average American already faces.

STEPHANOPOULOS: But that’s the dilemma, isn’t it?

GEITHNER: That is the dilemma.

STEPHANOPOULOS: Because when you look at health care reform again _ I know you believe it’s going to bend the cost curve over time. But the Congressional Budget office says, at best, the health care reform plans out there are going to be deficit-neutral over the next ten years. So to bring the deficits down, there is not enough money in the discretionary budget, we all know that. That means more revenues. The President has said that taxes won’t go up for any Americans earning under $250,000, but it doesn’t appear that he’s going to be able to keep that promise if you’re going to bring the deficits down.

GEITHNER: George, we can’t make these judgments yet about what exactly it’s going to take and we’re going to get there. But the very important thing, and no one is going to care about this more than the President of the United States, is for people to understand that we do not have a choice as a country, that if we want an economy that is going to grow in the future, people have to understand that we have to bring those deficits down. And it’s gonna, it’s going to difficult - hard for us to do and the path to that is through health care reform. But that’s necessary but not sufficient. We [are] going to do some other things too.

STEPHANOPOULOS: So revenues are on the table, as well?

GEITHNER: Again, we’re not at the point yet where we’re going to make a judgment about what it’s going to take. But the important thing –

STEPHANOPOULOS: But you’re not ruling it out, you can’t rule it out.

GEITHNER: I think what the country needs to do is understand we’re going to have to do what it takes, we’re going to do what’s necessary.

Everyone in Washington knows what Secretary Geithner means when he says “we’re going to do what’s necessary.”  His apparent equivocations are simply intended to provide the usual deniability for politicians with reelection campaigns to run.   

Tax increases are coming!

Is Buying an iPod Un-American?

We own three iPods at my house, including a recently purchased iPod Touch. Since many of the iPod parts are made abroad, is my family guilty of allowing our consumer spending to “leak” abroad, depriving the American economy of the consumer stimulus we are told it so desperately needs? If you believe the “Buy American” lectures and legislation coming out of Washington, the answer must be yes.

Our friends at ReasonTV have just posted a brilliant video short, “Is Your iPod Unpatriotic?” With government requiring its contractors to buy American-made steel, iron, and manufactured products, is it only a matter of time before the iPod—“Assembled in China,” of all places—comes under scrutiny? You can view the video here:

In my upcoming Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I talk about how American companies are moving to the upper regions of the “smiley curve.” The smiley curve is a way of thinking about global supply chains where Americans reap the most value at the beginning and the end of the production process while China and other low-wage countries perform the low-value assembly in the middle. In the book, I hold up our family’s iPods as an example of the unappreciated benefits of a more globalized American economy:

The lesson of the smiley curve was brought home to me after a recent Christmas when I was admiring my two teen-age sons’ new iPod Nanos. Inscribed on the back was the telling label, “Designed by Apple in California. Assembled in China.” To the skeptics of trade, an imported Nano only adds to our disturbingly large bilateral trade deficit with China in “advanced technology products,” but here in the palm of a teenager’s hand was a perfect symbol of the win-win nature of our trade with China.

Assembling iPods obviously creates jobs for Chinese workers, jobs that probably pay higher-than-average wages in that country even though they labor in the lowest regions of the smiley curve. But Americans benefit even more from the deal. A team of economists from the Paul Merage School of Business at the University of California-Irvine applied the smiley curve to a typical $299 iPod and found just what you might suspect: Americans reap most of the value from its production. Although assembled in China, an American company supplies the processing chips, a Korean company the memory chip, and Japanese companies the hard drive and display screen. According to the authors, “The value added to the product through assembly in China is probably a few dollars at most.”

The biggest winner? Apple and its distributors. Standing atop the value chain, Apple reaps $80 in profit for each unit sold—an amount higher than the cost of any single component. Its distributors, on the opposite high end of the smiley curve, make another $75. And of course, American owners of the more than 100 million iPods sold since 2001—my teen-age sons included—pocket far more enjoyment from the devices than the Chinese workers who assembled them.

To learn a whole lot more about how American middle-class families benefit from trade and globalization, you can now pre-order the book at Amazon.com.

Obama’s New Numbers

A new ABC/Washington Post poll is out.  The trends are not comforting for the White House.  President Obama’s approval rating - probably the most important number for a president these days - continues to drop. Approval by independents has fallen by 9 points over his term.  Support for his handling of the economy now garners the approval of barely half of respondents.  The number of people who see him as an “old-style tax and spend” Democrat has risen by 11 percentage points; the number who see him as a new Democrat “careful with public money” has dropped by about the same number.

A majority of the public now rejects a second spending splurge. Most now give avoiding deficits a higher priority than increasing spending, even to fight the recession.

The number of people in the poll identifying themselves as independents is at a post-1981 high. Most of those people may well vote most of the time for one of the major parties. For now, neither party is attracting much loyalty.

Surely some Democrats in Congress must be starting to wonder how far they should follow the president and his desire for ever greater spending.

What Fed Independence?

More than 250 economists have signed an “Open Letter to Congress and the Executive Branch” calling upon them to “defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.”

Allan Meltzer is not a signatory to the petition and he has explained why not.  The Fed has frequently not shown independence in the past, and there is no reason to expect it to do so reliably in the future.  Professor Meltzer has just completed a multi-volume history of the Fed and knows all-too-well of the Fed’s willingness to accommodate the policies of administrations from FDRs to Lyndon Johnson’s. 

I would add that the Fed’s behavior under Chairman Bernanke breaks new ground in aligning the central bank’s policy with Treasury’s.  Much of what the Fed has done, first under Bush/Paulson, and now under Obama/Geithner, involves credit allocation.  Since that ultimately involves the provision of public money for private purpose, it is pre-eminently fiscal policy.  Central bank independence is a fuzzy concept.  If it means anything, however, it is that monetary policy is conducted independently of Treasury’s fiscal policy.

In short, it is not the critics of the Fed who threaten its independence, but the Fed’s own actions.  Its intervention in the economy is unprecedented in size and scope. It is inevitable that those actions would lead to calls for further Congressional oversight and control.  The Fed is a creature of Congress and ultimately answerable to that body. 

The petition raises legitimate concerns about whether the Fed will be able to tighten monetary policy when the time comes, and exit from its interventions in credit markets.  But it is precisely the Fed’s own recent actions that raise those problems.  Critics of recent Fed policy actions have for some time complained that the Fed has no exit strategy.  Apparently the critics are now going to be blamed for the Fed’s inability to extricate itself from its interventions.

Cross-posted at ThinkMarkets