Tuesday, March 13, 2012

Picking the Losers Instead of the Winners

In my last post I speculated that if the economy grew modestly, but adhered more to fundamental economic principles, that it might be beneficial to us in the long run. There are several economic “fundamentals” that we need to get back to after many years of wild, ravenous, living.  Let’s look at some:

1.    Investment Capital Should Flow As To Maximize the Best Long-Term Gains

One of the enduring, damaging, effects of the housing bust is the misallocation of capital.  So much money flowed into the housing industry that other emerging industries suffered.  These industries should have been getting more capital and growing faster. The industries would be larger and stronger now and be creating more jobs.

In addition, people went to work in the construction and mortgage industries because that’s where the money was.  It would have been much better if people would have been learning (by working in) or training for the jobs needed in our current and future economy.  Freddie the House Flipper was raking in big bucks, but house flipping is a very specialized skill that is only valuable under unique circumstances.  Now Freddie has lost his money and may not have the education and skills necessary to find a good job in this economy.

2.    The Government Should Concentrate On Just Being the Government

It is not the role of the government to save companies by buying them.  The government should have managed the bankruptcy of General Motors to provide stability, but the government is supposed to be the “referee” of the economy.  You can’t be the referee and play in the game at the same time.  The Obama administration blatantly picks the winners in the game.  Examples include green energy companies, the Chevy Volt (okay maybe it picks losers instead) and the waivers given to select companies regarding the new healthcare laws.  The government is supposed to try to “level the playing field” not change the rules to benefit voting constituencies. The market should determine the winners and losers not the government.

Also, the government is supposed to be the “watchdog” so crises like the housing bust never happen.  But the bankers and housing industry threw the watchdogs some juicy T-bone steaks and the Washington fat cats were too busy stuffing their faces to growl, let alone bark.  With the loosening of mortgage rules the government not only didn’t halt the crash, they helped create it. It also failed to stop Bernie Madoff’s Ponzi scheme even when it was alerted about it several years prior to the collapse.  The government did a horrible job regulating commerce in the aughts (00’s). 

3.    The Government Should Regulate – Not Punish

The government’s response to the housing bust is to punishment the banks, not truly regulate them.  The new financial reforms that some people are so proud of end up punishing the innocent banks that followed the rules and did not exploit sub-prime loans. 

The government needs to tighten and improve its regulation processes.  When you punish the banking industry, you punish the employees, you punish the stockholders and you punish the innocent banks.  It’s like when your grade school teacher got so upset that she punished the whole class for the bad behavior of one student.  Some of the bad banks are finally getting punished.  There should also be specific penalties for specific people at specific banks.  This will increase future accountability for executive decisions.

4.    Everyone Who Earns An Income Should Pay Income Tax

Low wage earners should pay very little tax, but everyone should pay something.  Everyone should know how it feels to have the government’s hand in your pocket. This is part of the principle of shared sacrifice.  This unites us, not divides us. We are not a healthy, free-market, democracy if a large percentage of people pay no income tax.

5.    The Government Is Not A Sugar Daddy

The more the government helps some people, the more these people learn to become dependent on the government.  In many cases it would be better if the government “helped” people by helping them find jobs through training, etc. instead of just handing out free stuff.  There is a limit to how much assistance the government should provide and we have crossed that line a long time ago.  Now we have a significant percentage of the population dependent on the government for their needs.

This entitlement mindset is getting way out of hand.   Last week it was reported that a recent $1 million winner of the Michigan Lottery was caught receiving food stamps.  This has happened in Michigan before, however what made this noteworthy was the woman’s response.  She was in no way remorseful. She argued that she was in fact entitled to the food stamps because “she was not working and has bills to pay”.   These bills included mortgage payments on her two houses. 

The Chevy Volt
2012 Chevrolet Volt

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