As a result of the depressed economy the difference in income between whites and minorities have widened. While the most shrill will find this to be clear testament to the inherent racism in the GOP, the reality is that both Republicans and Democrats want and need a fair distribution of opportunity to maintain a stable society. Besides this has happened under a President that champions a ‘fairer’ society, with a compliant Congress for two years, who also controlled Congress for two years before his election.

Higher minimum wages causes lower employment at the lower end of the wage scale. If the minimum wage is increased during a strong economy this outcome will not become immediately visible, but its effects will be noticed at the next downturn. The minimum wage increased 24% from $5.85 to $7.25 in just two years (July of ‘07 to July of ’09). Now under our first black president, unemployment among blacks is as high as 19.2% and among black youth it is a staggering 41.3%.  Added friction costs to employment such as the health care bill and other regulations reduced employment further.  Job killing legislation has made the problem worse.  In 2009,  552,600  new businesses opened but 721,700 closed.

Going back to the Great Society of Lyndon Johnson we have spent enormously to eliminate poverty and all we have delivered is a huge dependent class requiring government subsidies that we can no longer afford, and a widening social gap that is the opposite of what anyone from either side of the aisle wants.

Government pressure to increase housing to the poor has led to a DECLINE in home ownership to the lowest level in 13 years as a result of a collapse in prices due to a growth that was fueled by forcing imprudent lending standards.  We hear that the problem was Wall Street greed, but this greed was less apparent in Canada where lending standards remained sound.

We have been told that deregulation under Bush caused the financial collapse. The repeal of the Glass-Steagall Act and the Commodity Futures Modernization Act, deregulating privately traded credit default swaps, (both signed by President Bill Clinton) may merit a second look. But we have a lot of regulatory agencies  and a lot of regulators. Perhaps the problem is not the absence of regulations but the quality of the regulations (and regulators) already in place.  The recent regulations requiring mortgages to be marked to market clearly were not considered in the light of the market collapse and this regulation caused the collapse to become much worse.  Imagine you have a mortgage that is performing as planned with no delinquency.  If the market collapses the value of this mortgage becomes zero even thought the borrower may have never missed a payment.

But the problem with regulations may be worse. Richard Bookstaber in A Demon of Our Own Design noted that the problem with many systemic failures is the complexity, and that regulations that have added to the complexity in fact may make the problems worse.

Private markets have failures and dealing with the failures is part of the system. In an effort to protect us from small failures we have created bigger failures.  Capitalism is at its best a competition of ideas and failure is way of dispensing with the bad ideas.

But bad ideas in government are enshrined and protected. Fraud in the private sector gets jail time. Ask Martha Stewart and Bernie Madoff. In government it gets you a generous retirement package, streets named in your honor, and too often re-election.

While regulations are deemed  to protect the consumer too often lobbyists are able to play the game to design regulations to benefit their constituencies rather than the voters.  The result of the growing climate of complexity and regulation is more lobbyists and rules that benefit the larger companies that have the infrastructure to manage the requirement. The end result is light bulbs at ten times the price that nobody wants,  and toilets that flush poorly.

Voters who push for quick solutions to real problems fail to see the outcome because they too often misstate the problem.  The current government solution is often a response to the failure of the last government solution.  The failure of the elected officials to accept any responsibility is why these problems are not getting solved.

There is no social problem so bad that an elitist designed government solution cannot make it worse.

In the 1970’s the delinking of the dollar from gold under Nixon ushered in  a decade of inflation.  The wealthy and other investors sought refuge in tangible assets and foreign currencies.  Tangible assets had the advantage of not generating 1099 and W-2 income that was subject to tax.  Inflation pushed people into higher tax brackets, making the marginal tax rates especially onerous.

Americans decided it was better to buy a second home, collect art or gems, and anything tangible that became more valuable with inflation rather than work harder to make more money that was lost to bracket creep and taxes.

Howard Ruff, Harry Brown and Doug Casey were the hard asset crowd teaching middle class investors how to own gold and Swiss Francs.  While still in my twenties I opened up an account at a Swiss bank with a mere $10,000.

Unexpected to the hard asset gurus, Fed Chairman Volcker, named under Carter, and Reagan got inflation under control and restored the value to the dollar.  Two dramatic results occurred.  Wealth was moved from hard assets to financial assets.  The incredible growth in the wealth in the upper income was largely a result of this shift.  It was less because the wealthy were getting a bigger share of the pie than because their assets went from unmeasured tangible assets to readily measured financial assets.  This was a result of less inflation and lower taxes on marginal income.

The second effect was a flood of capital from foreign countries to the United States.  These two shifts propelled the stock market of the 1980’s.  The freeing of domestic capital and the attraction of foreign capital created jobs, new companies and an increase in wealth across all income categories.

Today as a result of higher inflationary expectations, a weaker dollar, higher taxes, and massive regulation especially of the financial sector we are seeing domestic capital going overseas to find better opportunities and we are seeing a reduction of foreign capital seeking opportunities in the United States.  Foreign investment here is up since 2009 but still down from 2008. But the combination of domestic and foreign capital is down and that is bad for future unemployment and revenue that this government direly needs.

Without the kick in reported income that came from the shift in the 1980s we may not expect that tax decreases would yield the same results they did then, but raising taxes on a declining revenue base and a weakening dollar is a losing game.  This administration is in way over its head and they are still digging.

Exxon Mobil’s first quarter profit was $10.3 billion.

Of that $2.6 billion was earned on U.S. operations.

Exxon Mobil paid $3.1 billion in taxes; $500 million more than they earned on domestic business.

Profit per gallon runs between 6 and 7 cents per gallon.  Average tax on a gallon is 48 cents.

From the Neal Boortz radio show- 7/28/11

George Soros is closing his hedge fund to outside investors because of the new financial regulations.  He will be returning investor’s money.

Excerpt from Soros to close Quantum fund to outsiders by Dan McCrum:

Quantum, which will continue to manage about $24.5bn of Soros family money, blamed the decision on new financial regulations requiring hedge funds to register with the Securities and Exchange Commission.

“An unfortunate consequence of these new circumstances is that we will no longer be able to manage assets for anyone other than a family client as defined under the regulations”, Jonathan and Robert Soros, Mr Soros’ sons and Quantum’s co-deputy chairmen, wrote in a letter to investors on Tuesday.

New regulations require hedge funds with more than $150m under management to report details about investments, employees and investors, and also makes them subject to possible inspections by the SEC. Mr Soros’ decision contrasts with his own reputation as an advocate for both government and corporate transparency.

HKO Comment:

The Dodd Frank Bill increases regulation and oversight of the sectors that had little to do with the collapse such as hedge funds, and does little to regulate the sectors that most precipitated the collapse, most notably Fannie and Freddie which the bill’s authors had most defended from the requests for oversight prior to the collapse.  We seek the protection of the government, yet fail to ask who will protect us from the government.

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. …  Increasing America’s debt weakens us domestically and internationally.  Leadership means that ‘the buck stops here.  Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.  America has a debt problem and a failure of leadership.  Americans deserve better.”

Senator Barack Obama  on March 20, 2006 voting against raising the debt ceiling when George Bush was presdient.  The debt ceiling was raised with 52 votes with most Democratic senators including Obama and Harry Reid voting against it.