Monday, July 19, 2010

Bad to Worse

I find the parallel between the Obama Administration economic policies and those of the FDR Administration uncanny and very scary. The recently passed Financial Reform bill is anything but reform -- it is a potential disaster. What with significantly higher taxes coming on line in January, this bill makes it more difficult to carry out business in the United States. It is estimated that this bill is several hundred times more onerous and difficult to understand than was SOX and the average cost of complying with SOX is close to a million dollars a year.

The bill restricts and outright bans certain uses of hedging instruments.Without the use of hedges, hundreds of companies will simply move their operations to those countries that they previously simply hedged currency fluctuations for. How does a soy farmer hedge the potential of drastically lower soy prices? Under this reform measure, it is not allowed to.

Cristina Romer told us that unemployment would not exceed 8 percent. She based that on a government spending multiplier of 1.5 or so. Robert Barro has demonstrated that the government spending multiplier is significantly less than one. That only makes sense. Who best can choose how to spending money, the person who earns the money or the government? Resources are allocated to their highest valued use only by individuals spending their own money. Government does not care about efficiency.

If the Obama Administration policies are not reversed, the U.S. will follow Japan's recent history of lost decades; the U.S. will remain mired in very slow growth for some time. I am not optimistic that the policies will be reversed. Each time a Republican candidate for some office wins under the guise of cutting government, fights with unions and trial lawyers leave the candidate compromising principles. Government Christy in New Jersey just did that with his cap on property taxes. Two term governor of North Carolina has done that and is now susceptible to lsoing the seat to a Democrat. Will the Tea Party remain adamant about cutting spending if the economy remains in the doldrums in 2012 or 2014? I don't think so.

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