The CEO of General Motors wants to tax gasoline an additional $1.00 a gallon.  Let’s think about that. The higher the price of gasoline the less one drives a car, and the less one drives a car then the less one  needs a car and the less cars are sold. So now the CEO wants a tax that will negatively impact the sales of the product his company produces.  Unless of course he is producing a product that nobody wants such as a very small high mileage car that needs a very high price of gas to justify its purchase.  This just shows you how screwed up an industry can get once the government gets its sinister claws in it.

There are those who think that money is evil, and that we should produce without consideration of monetary compensation.  Welcome to the blogosphere where a lot of very bright PhDs and a lot of  well read amateurs share some incredible ideas without any thought of compensation.  In fact the greatest advance in technology is in social networks and information sharing with little consideration of monetary compensation.

The problem is that this advance generates very little revenues which generates no taxes which is sorely needed to offset this ballooning deficit.  Unlike the automobile and the airplane which generated millions of jobs the internet enriches very few and encourages many to share valuable information for free.

Ironically the very people who think money is the root of all evil need the income the most to balance the budget and the new economy is not generating the revenue to fund their programs.  Neither tax cuts nor tax increases will generate the revenues needed from a new technology that has so many sharing so altruistically ( i.e.  “for free”)

We are addicted to a growth in revenues that is not being generated by the new economy.

Banking regulations are restricting a recovery more than we realize. I know very wealthy people who are unable to get a mortgage.  Some of the most experienced real estate investors are kept from buying the very distressed properties that so desperately need a buyer.  People who have never been a day late on a payment are having their credit lines cancelled and driven into near bankruptcy by banking regulations that make absolutely no sense. There is no left and right in this insanity, just right and wrong.

Weiner  is checking into sexting rehab. This may be the compromise that keeps his job. What are the odds of a relapse of some sort? His problem is less about his perverted digital juvenile behavior than the fact that he is just basically an incredible jerk.   I am not entirely confident that rehab can cure that.

The government has spent trillions to stimulate the economy. Interest rates are at a record low. Yet American businesses are sitting on top of trillions of dollars of cash, reluctant to spend any of it to grow or hire.  Does stimulus not work?

The theory is that recessions are caused by a decline in private consumption and that by replacing it with government consumption the machinery of production will continue to flow and jobs will be saved. By not having to pay unemployment benefits the government’s cost of the stimulus will be partially offset and taxable incomes will remain high.

This theory is credited to John Maynard Keynes during the Great Depression. Today it seems a bit odd that a lack of consumption would ever be a problem with Americans, but this was the case during the Depression for logical reasons.  When you are in a deflation goods become cheaper in the future. It pays to delay consumption.

During the inflationary years of the 1970’s consumers were incentivized to buy quickly to avoid having to pay a higher price later. Investments in financial assets, a future oriented investment, declined and investments in tangible assets soared  .

When the supply side prescription of a stable dollar and lower taxes was enacted under Reagan, inflation declined, and assets shifted from tangibles to financial propelling the substantial boom in equities that lasted twenty years.

The impact of stimulus depends on numerous other factors.  A onetime tax rebate has little long term impact.  If uncertainty reigns the stimulus will be saved rather than spent. No one will alter their consumption behavior for a onetime benefit. George W. Bush’s tax rebate of a few hundred billion in early 2008 had no impact.  It was laughably small in retrospect, at least by today’s standards.

That leaves the blind believers in stimulus economics like Paul Krugman in a no lose logical loop.  If the economy picks up it was because of the stimulus; if it lags or doesn’t respond then it was because the stimulus was too small or the wrong kind.

The “cash for clunkers” cleared off some inventory and gave some incentive for the auto manufacturers to increase production, but this is short lived if the economy is not already poised to rebound. All it will do is push consumption forward and delay consumption later, in one sense delaying the recovery.

The incentives for home buyers ended and home sales crashed by far more than the consensus estimated. In some areas home prices dropped after the program by more than the amount of the ‘stimulus’ credit. This means that the incentive had the unexpected, or at least the unwanted, effect of keeping prices higher for home buyers and delaying the ultimate recovery of the housing market.

A government spending stimulus program may have a positive effect in a small way for a short period of time if the overall confidence in the system is unchanged.  But the current administration has so shaken the confidence in the basic system that few are willing to make any long term plans or investments.

Cap and trade, health care legislation, the card check bill, and the record large deficits  themselves have most businesses in defensive mode. No one is certain what these bills will cost but they feel certain they will increase the cost of doing business.

The administration’s contempt for the rule of law leaves businesses unsure what the rules truly are.  Bankruptcy law was usurped in the takeover of GM and Chrysler. BP may not be the most likely target for empathy but by what authority does the president force a $20 billion settlement fund outside the legal system?

Political hostility towards businesses in general creates a cloud on business and investment. But the uncertainty of playing a game where the rules change every election cycle will counter any stimulus effort the administration can consider.

The simple and obvious logical flaw in taking a dollar from one person and giving it to another and considering this a stimulus remains. This is the common economic flaw of Bastiat’s broken window.  We see only where the dollar was spent and erect signs to cheer the projects built by government ‘stimulus’ money, but are blind to the spending that did not occur from the dollar taken to fund the program.

The government can facilitate growth  with a sound and stable economy and by protecting property rights, but only a fool still believes they can actually create a job. Even necessary government workers still require a sacrifice from the private sector.

The best stimulus is a sound and dependable currency, low taxes, and clear and consistent regulations. It has proven effective and successful every time it was used, throughout history and regardless of which political party applied it.

Random thoughts

GM’s effort to target Toyota’s  customers  in the midst of their record recall notice seems in poor taste, especially in light of the record amount of taxpayer money that is now supporting GM.  This is like the arrogant rich kid who brags about being  smart when he was just lucky enough to inherit daddy’s money.  Kudos to Honda for expressly rejecting this tactic and Ford for just making money without taxpayer funds.   This is a big debit to GM’s karma account. Remember how many Toyotas are manufactured in this country.

Has anyone ever heard a peep from this administration about the government’s  responsibility for the economic crash, or do we just keep adding to the list of corporate demons?  First the oil companies, then insurance companies, then the health care providers and then the banks and financial institutions.  I need oil companies, insurance companies, health care providers and banks because they provide stuff and  services I need and want. I wish I could say this about the government .

After reading and writing about the financial crisis, I realize that the best analysis is devoid of political and partisan scapegoating.  The causes  were multiple and extended back more than 25 years. While much is clear in hindsight, at the time there were seemingly rational reasons for every stupid step toward the cliff.  How do smart people make such stupid mistakes?  One small stupid step at a time.

I have observed that there is an innate sense of trust on the social networking sites, especially Facebook.  We have connected with people we haven’t seen in decades, and there is an instant sense of trust.  Rules of etiquette on Facebook are unwritten but seemingly obvious just the same.  I wonder if the hours we spend on Facebook comes at the expense of television viewing.

With a more substantial majority than either party has enjoyed in decades and control of the White House, the Democrats have failed to pass any of the legislative initiatives other  than the stimulus package early in 2009(and the absurd cash for clunkers program) . It seems that either the bills they are trying to pass stink or that they must be incredibly politically incompetent.

It was easy to predict that the Cash for Clunkers would only drive up sales very temporarily as the expense of future sales.  Recent results have verified the sharp dropoff in auto sales when the program ended.

It was also easy to predict a backlash from consumers over the nationalization of GM and Chrysler.  This bailout was a self fulfilling failure. GM and Chrysler were down far more than other car companies. GM was down 45%, Chrysler was down 42% and Ford was down a mere 6%.

Yes this is only correlation but the stories of consumers avoiding the nationalized car companies are becoming common, even if they are rarely covered by the press.

While the very expensive bailout may have seemed attractive in the short term, it may have succeeded in destroying so much customer loyalty that it will prove disastrous in the long run.  GM would have been better served to have reorganized through an orderly and LEGAL bankruptcy.

“[GM's] pride, [the celebrated] Chevy Malibu, was outsold in June not only by the Japanese competitors and the Ford Fusion but even by the Korean Hyundai Sonata. . . . GM has some fine vehicles, but it is working uphill against public resentment. Here are the people who don’t like it: the stockholders who got wiped out, the bondholders who got moved to the back of the creditor line, the dealers who were dumped, the workers who lost their jobs, the retirees who are at risk of losing some of their health benefits, the owners of orphaned brands (Pontiac, Saturn and Oldsmobile) and the several million taxpayers who think government support is just wrong” — veteran Forbes Magazine auto writer Jerry Flint

HKO comment- it is interesting to note that the American consumer may have less hostility to a foreign owned car company than to a domestic car company owned largely by the government.  A foreign car company is just an exercise of free trade; a government owned car company is just an exercise of fascism.  GM’s chances would be much improved if the government would sell its stock if the union portion of the ownership is kept minimal.