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The Late Great State of California

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My family moved to California in 1950, part of the post-WWII westward migration. My widowed mother, tired of Boston’s dreary winters, felt the westward pull. My eldest brother, a WWII Navy veteran, had heard good things about San Diego from sailors who had been stationed there during the war. So, California, here we come.

I would like to think those were the golden years, at least for us. California was new, bright, warm, and full of promise. The East was old and cold. And San Diego was thriving. Defense and aerospace jobs were plentiful. Land was cheap, homes were cheap. A building boom met the housing needs for optimistic migrants. You could get things done in California.

It’s not that California anymore. We are overregulated and overtaxed and people aren’t so optimistic. People want to leave.

What Happened to the Golden Years?

A recent poll of the state’s registered voters by Cal’s Institute of Governmental Studies revealed that half have considered leaving the state. The top reason was the high cost of housing (especially by young people); high taxation was second.

The poll also asked if California was one of the best places to live or a just an OK-to-lousy place to live. About half said yes and half went the other way. Interestingly 67% of Democrats said it was one of the best while 77% of Republicans disagreed. Apparently, Democrats like expensive housing, high taxes, and being overregulated.

Are people leaving California? It depends on whom you are talking about. More people are out-migrating to other states than those coming in (156,000), but much of that was offset by international migrants(+118,000) resulting in a net population loss of only 38,000 (2018).

Perhaps it has something to do with the fact that California is the most regulated state in the nation — by far. The Cato Institute analyzed the laws of each state by measuring the amount of individual legal restrictions in their legal codes. California was at the top, way at the top with 395,503 individual restrictions (laws, prohibitions). We surpassed No. 2, ultraleft New York, by almost 90,000 restrictions. Our politicians in Sacramento keep passing hundreds of new laws every year yet half of Californians are thinking of leaving.

And then there are taxes. California has the highest income tax rate of all states (13.3%). The highest combined federal and California income tax rate is now about 50% of taxable income. If you and your spouse have $200,000 of taxable income, your combined federal and California tax rate is 41.3%. That’s not something you should be applauding since California ranks 42 out of 50 states in fiscal solvency .

Two new pieces of legislation will make things worse, much worse. One is statewide rent control. The other is the reclassification of independent contractors as employees.

The War Against Low-income Renters

A rent-control law, Assembly Bill 1482, was signed by Governor Newsom on October 8, 2019 . It limits apartment rent increases to 5% plus inflation per year (not to exceed 10%). It affects units built at least 15 years ago (on a rolling timeline). Rents can be adjusted to market rates only when a tenant leaves, but tenants can only be evicted for “cause.” Newsom said “These anti-gouging and eviction protections will help families afford to keep a roof over their heads …” But what if it doesn’t? What if it will harm tenants, especially poor ones?

The advocates of rent control seem to have no grasp on the economics of price controls. Perhaps they should consult an economist. In a survey of prominent economists , 81% agreed that rent controls have not had a positive impact where they have been tried.

Why would these cold-hearted economists oppose rent control? Because rent controls don’t work and they do the opposite of what was intended: they hurt poor renters.

Here is what will happen with rent control in our high-demand coastal communities:

  • Owners will raise rents to the maximum every year to protect asset values.
  • Owners will be far more selective in choosing tenants, thus limiting housing for poor, less creditworthy applicants.
  • Tenants will be reluctant to move from rent controlled properties which tends to freeze the rent-controlled rental market leaving fewer apartments available for rent.
  • Rent controlled units will be gentrified as historical evidence shows that higher income tenants will be the most benefited class of renters.
  • Affordable apartment inventory will be further reduced as owners evict tenants, tear down older buildings, and build new, more expensive units which will be exempt from rent control.
  • More apartments will be converted to condos, further reducing affordable inventory.
  • Owners will cut back on expenses to preserve cash flow, thus reducing the quality of rentable units.

Overall, rent control will disincentivize investors from investing in affordable apartments.

These conclusions aren’t guesses or just fuzzy theories — they are based on actual experience from rent controlled areas.

Adios Gig Economy

The new law on classifying independent contractors as employees (AB 5) is a stab in the heart of the gig economy — the economy that provides convenient low-cost services when you want them. Think Uber and Lyft for ride sharing. You will now pay more and get less. That assumes they will stay in California. Uber, as everyone knows loses money (EBITDA earnings for 2018: $2.41 billion). If they can’t make money on their present business model, how can they possibly make money if their driver costs go way up? So, I repeat myself: will they be around in a couple years? Will those drivers who feel they are being treated unfairly be out of work?

This is a classic example of the Canute Effect.1 If you recall, Canute was the Danish king, who, legend has it, ordered the tide to stop coming in. Canute was obviously either detached from reality or just an arrogant megalomaniac who thought he could command nature.

In our case, our legislators believe they can just pass a law and make things better. It doesn’t work that way. There are controlling economic realities that they ignore or, most likely, aren’t even aware of.

Everybody knows that Uber changed the world for the better. Consumers loved the new service. Drivers signed up to make extra money, setting their own hours. So why do our politicians want to kill Uber and Lyft? We should ask ourselves: who would be better off without Uber and Lyft? Here’s a clue: in the governor’s statement supporting AB 5 he went out of his way to say, “A next step is creating pathways for more workers to form a union, collectively bargain to earn more, and have a stronger voice at work.” It’s an obvious power grab by unions who wish to unionize (i.e., kill) the gig economy. Unions are famous for protecting the status quo and fighting for more power. Taxi companies no doubt had their hand in it too.

Understand that Uber and Lyft are just the tip of the gig economy. We all lose.

The Tipping Point

I just reread Malcolm Gladwell’s wonderful book, The Tipping Point, in which he details the things that push societal change over the edge. My fear is that California is getting to a point where the dynamism that has driven our mighty state’s prosperity will be snuffed out. Are we at the tipping point yet? I don’t really know, but with 395,503 restrictions on the books, I don’t see how it can get better.

Our politicians are quick to say this will never happen. They say we have the most vibrant tech economy in the world. Our farms feed the country. People love California. They believe they are making things better. Yet they continue to pass laws that tamp us down. At some point it will tip over and the impact of their regulations and taxes will overcome the forces that made California great. These new laws are getting us closer.

  • 1. Canute Effect: A belief by politicians that they can change reality by fiat.



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Economy

It's Trump vs. the Deep State vs. the Rest of Us

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One of the best side effects of the Trump presidency has been the hostility of the so-called “deep state” or “intelligence community” directed at the president.

This, in turn, has led many Americans to realize that America’s powerful, un-elected secret police agencies serve an agenda all their own. Consequently, polls show one’s views of the CIA and the FBI depend largely on one’s ideological bent. Polls from Fox News and NBC news in recent years show that as various government bureaucracies have ratcheted up their hostility to Trump, more Democrats and Hillary Clinton voters have said they trust the CIA and the FBI.

Why the president and this deep state should be at odds has never been obvious to casual observers. Last month, however, in an article titled “Trump’s War on the ‘Deep State’ Turns Against Him,” the New York Times at last explained that there is indeed very real enmity between Trump and agencies such as the CIA and the FBI. The Times contends that Trump “went to war with the professional staff” of the intelligence agencies and the State Department.

The Times notes Trump has condemned “deep state bureaucrats,” and claims Trump’s “hostility toward government was strong from the start. He blamed the leak of the so-called Steele dossier of unverified allegations against him on intelligence agencies and never trusted their conclusion that Russia intervened in the 2016 election on his behalf.”

Trump was right to be defensive, of course. But that controversy over Russia was never really about what the Russians were up to. The focus was always largely about how much Trump colluded with the Russians to win the 2016 election.

Ultimately, the evidence was so non-existent, that after a nearly-three-year investigation, Robert Mueller was unable to establish evidence of collusion between Trump and the Russians. As Glenn Greenwald has noted: “not a single American  — whether with the Trump campaign or otherwise — was charged or indicted on the core question of whether there was any conspiracy or coordination with Russia over the election.”

But this lack of evidence did not stop John Brennan, for example, from claiming for months that he had special secret knowledge of the matter, and that Trump — or at least many around him — were going to be indicted for colluding with the Russians.

Although Brennan is a “former” CIA director, he nonetheless clearly remains well ensconced within the world of his fellow spooks. He is, as ABC News correspondent Terry Moran put it, “cloaked with CIA authority.” Brennan even insisted that he ought to retain his security clearance, presumably forever, even though he is accountable to no one. Such is the mindset of the deep state bureaucrat. They live in a world where they deserve special privileges just for being government employees.

Moreover, Brennan has been joined in his attacks on the president by other former high-ranking members of the deep state, including former FBI chief James Comey and former Director of National Intelligence James Clapper.

Those currently employed by the deep state have joined the anti-Trump campaign as well. Much of the current campaign against Trump is being orchestrated by CIA agents, and according to Sen. Rand Paul on Wednesday, CIA analyst Eric Ciaramella is supplying much of the prosecution’s information. Alexander Vindman, an Army officer and bureaucrat with the National Security Council, has testified to Congress in order to fuel impeachment efforts against the president as well.

Fêting Deep-State Bureaucrats as Heroes

None of this is to say the Trump administration lacks any taint of corruption. Like all presidents, it is likely the Trump administration expects favors for favors. The only thing different about Trump is he is not skilled at keeping the everyday corruption of the White House a secret.

But what is especially problematic for him is the fact that so many of his critics coming out of the bureaucratic woodwork are from intelligence agencies and from the military.

Unfortunately, in the United States there is a well-established bias in favor of employees from national security agencies. Even the very language used by the media speaks to this favoritism. In the Times piece, for example, the authors speak of one of Trump’s critics, one “William B. Taylor Jr., a military officer and diplomat who has served his country for 50 years.” Note the implied selflessness of Taylor’s work. An equally accurate description of Taylor would be “he was employed by government agencies for fifty years” or “the taxpayers paid his bills for fifty years.” Instead, we’re told he “served his country.” The propaganda value of the media’s pro-military bias is not lost on the officers themselves, and it’s no surprise Vindman, a Lt. Colonel, testified to Congress in his military uniform.

Other examples can be found every time Trump fires a lifelong bureaucrat from the upper echelons of the various “national security” agencies. For example, last summer, when Trump fired director of national intelligence Dan Coats, the Atlantic portrayed Coats as a principled idealist who “spoke truth to power.” Coats was fired, the author tells us, because of his devotion to the truth, even if it undermined Trump’s agenda. The best proof of Coats’s honest determination, we’re told, was the fact he “won praise from former intelligence officials.”

[RELATED: “19th-Century Americans Didn’t ‘Support the Troops‘” by Ryan McMaken]

In real life, of course, Coats is a lifelong politician and bureaucrat who prior to his dismissal had collected a government paycheck for four decades. As a politician he lobbied for gun control and supported the disastrous 2003 Iraq War. The idea that his post-Congressional career was marked by dogged devotion to the truth ought to strike one as rather fanciful.

A Slipping Facade

But even the New York Times is no longer pretending that the deep state doesn’t exist, and that it doesn’t have its own political agenda. In fact, as noted by Robert Merry at the American Conservative, the Times article even “portray[s] the current impeachment drama as the likely denouement of a struggle between the outsider Trump and the insider administrative forces of government.”  This is especially significant since it is also increasingly clear that, “American foreign policy has become the almost exclusive domain of unelected bureaucrats impervious to the views of elected officials — even presidents — who may harbor outlooks different from their own.” Merry concludes the past three years of investigations of the president, conducted by government bureaucrats, is “the story of entrenched government bureaucrats and a president who sought to curb their power. Or, put another way, the story of a president who sought to rein in the deep state … that sought to destroy his presidency.”

Some of these deep-state agents even admit their willingness to subvert the official chain of command to suit their own purposes. Vindman, for example, told the impeachment committee he actively sought to subvert Trump administration relations with the Ukrainian government largely to preserve Vindman’s own vision for American policy. In the mind of this mid-level bureaucrat, American foreign policy is set not by elected officials in Washington DC, but by the bureaucrats themselves.

Why Take the Administration’s Side?

Back in 2017, the battle lines between Trump and the deep state were already being drawn, and at the time I wrote:

This isn’t to say that Trump is the “good guy” here. As with the US military establishment overall, the deep state is by no means monolithic. Like any group of self-serving institutions, there are competing factions. Trump clearly has allies within some areas of the deep state, as can be reflected in Trump’s attempts to massively expand military spending at the expense of the taxpayer.

But the fact he’s considered an outsider in Washington by so many should suggest there are reasons to support him over the entrenched bureaucracy.

Indeed, as Greenwald pointed out in a 2017 interview, it’s not a coincidence that former and current members of the deep state clearly preferred Clinton to Trump during the campaign. The deep state bureaucrats prefer an insider like Clinton who who can be trusted to not upset the national security status quo in any way.

Although Trump is no true friend of peace or human rights, he commits his sins largely out in the open. As such, his presidency is relatively transparent, and Greenwald prefers that to the hidden (and extensive) crimes of the deep state.

After all, deep-state agencies face virtually no scrutiny of — and even less real opposition to — their many misdeeds. These, of course, are so numerous as to be impossible to list. But just for starters we might refer to a 2017 article by Sharyl Attkisson in The Hill titled “10 times the intel community violated the trust of US citizens, lawmakers and allies.” It’s a laundry list of illegal, immoral, and blatantly unconstitutional acts which well illustrate the near total impunity with which these agencies operate. Abuse of spying powers is so rampant within the FBI, for example, that even the lopsidedly pro-spying FISA court was forced to conclude the FBI routinely overstepped the bounds of legal surveillance. And, of course, without the heroic whistleblowing of Edward Snowden, the NSA would still be falsely insisting that it doesn’t routinely spy on virtually all Americans, whenever and however it likes.

In response to these facts, one might still insist “but presidents lie a lot and break laws too!” That’s true, but the difference between presidents and deep-state bureaucrats is well illustrated by the current impeachment controversy. It’s the president who’s facing indictments, public attacks, and the prospect of removal. On the other hand, the deep-state bureaucrats who oversee many counts of corruption, illegal spying and leaking, remain safely hidden from public view. Those who routinely lie, deceive, and abuse their power often go on doing so for decades. As the years pass, they become ever more entrenched in the federal bureaucracy, invisible to the public, and — as we are now seeing — often answerable to no one.

Presidents come and go, and they often face fierce opposition from the other party or from the media. The deep state, meanwhile, is said to be full of national heroes who “serve their country” and “speak truth to power.”

It should be easy to see, in the battle between the president and the deep state, which side is the most dangerous. 



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Economy

Cautionary Tales Ep 2 – The Rogue Dressed as a Captain

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One crisp Berlin morning, in 1906, a small group of soldiers were led on an extraordinary heist by a man they believed to be a captain. So how did an ageing nobody in a fake uniform trick them into taking part in the crime of the century? Some say we humans will obey orders from anyone who dresses the part… but the real reason why we fall for tricksters time and again is far more interesting. Fraudsters and charlatans reel us in slowly by using psychology against us.

Featuring: Alan Cumming, Russell Tovey, Rufus Wright, Melanie Gutteridge and Ed Gaughan.

Producers: Ryan Dilley and Marilyn Rust. Sound design/mix/musical composition: Pascal Wyse. Fact checking: Joseph Fridman. Editor: Julia Barton. Recording: Wardour Studios, London. GSI Studios, New York. PR: Christine Ragasa.

Thanks to the team at Pushkin Industries, Heather Fain, Mia Lobel, Carly Migliori, Jacob Weisberg, and of course, the mighty Malcolm Gladwell.

 

Further reading

The best English-language account I could find of the Kopenick story is by Benjamin Carter Hett. “The ‘Captain of Köpenick’ and the Transformation of German Criminal Justice, 1891-1914,” Central European History 36 (1), 2003.

I first read about the story in Nigel Blundell’s The World’s Greatest Mistakes. Other accounts are at Strange History  and The Rags of TimeKoepenickia offers various contemporary German newspaper accounts. There are many small differences in the accounts but the overall story remains just as remarkable.

The definitive account of Stanley Milgram’s experiments is Gina Perry’s Behind the Shock Machine and Alex Haslam was interviewed by Radiolab in a great episode about the same topic.

An overview of the evidence on tall presidents is Gert Stulp, Abraham P. Buunk, Simon Verhulst, Thomas V. Pollet, “Tall claims? Sense and nonsense about the importance of height of US presidentsThe Leadership Quarterly  Volume 24, Issue 1, 2013.

The study of gubernatorial elections is Daniel J Benjamin & Jesse M Shapiro, 2009. “Thin-Slice Forecasts of Gubernatorial ElectionsThe Review of Economics and Statistics, MIT Press, vol. 91(3), pages 523-536, 02.

Daniel Hamermesh’s Beauty Pays looks at the overall evidence that appearances matter – including in politics.

 

 

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Economy

Market Talk – November 14, 2019

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ASIA:

China is insisting that the US retract any tariffs as a part of “phase one” of the trade deal. “The trade war was begun with adding tariffs, and should be ended by canceling these additional tariffs. This is an important condition for both sides to reach an agreement,” China’s Ministry of Commerce spokesperson Gao Feng said. Still there seems to be other sticking points such as the farm required purchases from China each year as well as US demanding China stops opioid sales into the US.

The Japanese economy showed signs of slowing in the third quarter as newly released data shows the annualized rate of growth was only at 0.2%. This is a sharp drop from the previous quarter, which saw the growth rate at 1.8%. One of the main reasons for the bad performance was the weak exports, with China being a large trading partner slowing down.

Singapore has created a nationwide AI initiative to become a “Smart Nation” by 2030. There will be five projects, which will touch on areas such as logistics, healthcare, border security, estate management, and education.

Asian Market Closings:

  • Shanghai advanced 4.63 points or 0.16% to 2,909.87
  • Kospi advanced 16.78 points or 0.79% to 2,139.23
  • ASX 200 advanced 25.50 points or 0.38% to 6,759.80
  • NIKKEI 225 decreased 178.32 points or -0.76% to 23,141.55
  • Hang Seng decreased 247.77 points or -0.93% to 26,323.69
  • SENSEX advanced 170.42 points or 0.42% to 40,286.48

EUROPE/EMEA:

In the UK, the Brexit Party and Conservatives are trying to make a deal that would put the Conservatives into power and grant the Brexit Party many Labour seats. However, they failed to reach a deal. The Brexit Party wanted the Conservatives to remove any candidates running in certain areas, while the Conservatives said they would put in “paper candidates” instead.

Germany narrowly avoided a technical recession in the third quarter as the economy grew by 0.1%. Many analysts expected a negative rate, meaning a month-over-month negative contraction as a technical recession. However, the growth brings growth to 0.5% from July to September. Still, this is no means an indicator that the economy is doing well, as there are many areas in which the economy is weak such as the auto industry which is a key driver for the German economy.

The EU is planning on revising the introduced Mifid ii to the industry. Reports are showing that the industry is getting increasing frustrated with the introduced regulations. “No decision has been taken so far on the review of Mifid II, though the commission acknowledges that some adjustments may be required,” a spokesperson told citywide.

European Market Closings:

  • CAC 40 decreased 6.0 points or -0.10% to 5,901.08
  • FTSE 100 decreased 58.45 points or -0.80% to 7,292.76
  • DAX 30 decreased 49.84 points or -0.38% to 13,180.23

US/AMERICAS:

John Williams, president of the Federal Reserve Bank of New York, believes that the current monetary policy will enable the Fed to further stimulate the economy if needed. “Monetary policy should not get caught up in ups and downs on trade,” Williams noted, specifically mentioning both China and Brexit. The bank president admitted that the Fed needs to conduct additional research to understand the resilience of the repo market. “Reserves are now at levels that are consistent with ample reserves,” he stated. Despite claiming that reserves are “ample,” the Fed accepted a $73.59 bid on Thursday and has no concrete plan for when the repurchasing will cease.

Robert Kaplan, president of the Federal Reserve Bank of Dallas, voiced that he does not foresee the US economy entering into a recession despite sluggish growth. The strong labor market and increased consumer spending should negate the downturn in business investment and manufacturing, according to Kaplan. Kaplan expects the economy to expand by around 2% this year.

Banxico, Mexico’s central bank, lowered its benchmark interest rate by 25 basis points to 7.5%. This is the third consecutive time that the bank has decided to lower rates. The bank cited “stagnant” economic conditions as a main reason for the cut. Banxico members made it clear that they plan to gradually decrease the target rate and expect it to reach 7% before the end of the year and 6% by June 2020.

“China is becoming more and more part of Brazil’s future,” President Bolsonaro said after meeting with Chinese President Xi. Russian President Putin, Indian Prime Minister Narendra Modi, and South African President Cyril Ramaphosa will come together in Brazil for the BRICS Business Council. China is currently Brazil’s largest trading partner, and Bolonaro is hopeful that China can help Brazil “diversify our trade relations.” President Xi voiced optimism as well, citing that stronger ties with Latin America could help China “build an open world economy.”

US Market Closings:

  • Dow declined 1.63 points or -0.01% to 27,781.96
  • S&P 500 advanced 2.59 points or 0.08% to 3,096.63
  • Nasdaq declined 3.08 points or -0.04% to 8,479.02
  • Russell 2000 declined 0.39 of a point or -0.02% to 1,588.79

Canada Market Closings:

  • TSX Composite advanced 14.19 points or 0.08% to 16,972.18
  • TSX 60 declined 0.35 of a point or -0.03% to 1,015.68

Brazil Market Closing:

  • Bovespa advanced 496.93 points or 0.47% to 106,556.88

 



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