Gov't subsidies bad economic policy

Bill Dunkelberg's comments on KYW:

Philadelphia Gas Works wants a hundred million more dollars of your money. Why? Well, over the years, they have been inefficiently managed, beset with scandals and fraud, stuffed with the patronage appointments of mayors, saddled with unfunded pension liabilities and unable to get people to pay their gas bills since grievances ultimately end up on the doorstep of city council which is more concerned with votes than building an efficient gas company.

So, the solution proposed by the gas company is to raise rates and make honest paying customers underwrite the transgressions of management and politicians, including the secret half a million dollar bonus management paid themselves last year. Public companies must disclose such things to shareholders, but the Gas Works feels no such obligation to rate payers.

If the Soviet Union didn’t prove the point, Philadelphia Gas Works does. Governments can’t run businesses. And, rather than face the music and fix the Gas Works, politicians prefer to pass the problems on to the next administration. Why make hard choices when you can pass the mess on to the next administration?

It is no surprise that ford is following in the footsteps of General Motors. Both are saddled with labor agreements that make them uncompetitive. Chrysler too had these problems but was able to pass them on to Daimler by merging with the European automaker whose stock price has reflected the poor wisdom of that decision.

So, Ford, like GM, will offer to buy-out tens of thousands of its union workers, paying out money that could be used to modernize its production facilities and update the designs and engineering of its line of vehicles. This is certainly a poor use of a company’s capital funds, shrinking the assets of the company with no improvement in the company’s plant, equipment or engineering and design. My prognosis of several years ago stands, these companies are going bankrupt. If they survive, the will me mere shadows of their former corporate size

In the meantime, Nissan and Toyota make cars here with American labor and make a lot of money. When these companies ask you to “buy America” campaign, they are asking you to overpay for your GM car to support their inefficiencies since they can’t compete. For shame.

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The median house price in 2005 rose 15 percent nationwide and over 40 percent in some markets like Las Vegas and Fort Myers Florida. But all that is over. The bubble has burst in these formerly hot markets and lost air nationwide. To date, the median house price in the US. has shown no gain.

According to Merrill Lynch, this imperils the economy since according to their estimates, half the growth in the economy last year was housing related and since 2001, a third of the jobs created were generated by the housing boom.

Perhaps just as significant, the resources invested in housing do not contribute to improved worker productivity. Adjusting the strong investment spending numbers for new home construction produces much weaker investment of the kind that increases output per worker hour and ultimately worker pay. We may be living in newer nicer houses, but all the resources devoted to more houses won’t contribute to higher wages. Nationwide, the total value of homes rose 9 trillion dollars to 22 trillion in the past 5 years, but this won’t contribute to income growth in the future.

A government funded agency recently paid Alaska Airlines $500,000 to put a painting of a salmon on just one of their planes. If that seems a but much, consider that one-third of Alaska’s jobs are supported by government spending and that Alaskans receive about $1000 a year per person from the earnings of a 34 billion dollar fund accumulated from oil royalties by the state.

With that much money, one wonders why Alaska receives more federal goodies per capita that any other state and a 200 million dollar bridge to nowhere funded by you that connects Ketchikan to an island with only 50 inhabitants and an airport. Maybe the fact that the head of the appropriations committee comes from Alaska has some effect.

Speaking of benefits per capita, there were only 400 non-native people in 1870 when we bought Alaska from the Russians. Now there are over 600,000, a large percentage gain but making Alaska’s population no larger than a fair sized city. But as a state, it has two senators, and that’s a lot of power.

Since the Soviet Union’s collapse, Russia’s population has declined by 6 million to about 143 million people. Per capita GDP remains below that of Mexico. Fertility has collapsed as many feel too poor to have children. The highest fertility rates are found among the Muslim population.

Life expectancy has also declined, especially for men who can now expect to live on average to less than 60. Heart disease occurs at one of the highest rates anywhere, the suicide rate is 5 times that in other industrialized countries and the odds of dieing a violent death is unprecedented among industrialized countries. 36,000 died from alcohol poisoning last year compared to a few hundred in America. Heavy smoking, pollution and a poor health system exacerbate the loss rate. And now AIDS has become a problem.

Hooked on a vision of restoring Russia to world prominence with oil power, precious oil money is spent on the military and not on much needed health, infrastructure and job-generating development. Demographically, Mr. Putin maybe presiding over a vanishing empire that he is powerless to save. This certainly casts a pall over prospects for doing business in Russia.

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In most years, it seems that American farmers make most of their income from government subsidies and not from farming. But, six out of ten farmers get none of the $20 billion in payments, and 10 percent get 72 percent of the subsidy dollars. Over half goes to large commercial agricultural giants like Archer Daniels Midland and over half goes to just 25 of our 435 congressional districts (the representatives from these districts have major seniority in congress). Corn growers get almost half, cotton growers over 20 percent even though developing countries could produce the cotton much more cheaply. 93 percent of the money goes to corn, wheat, beans, rice, cotton and wheat. The subsidies are even bigger in the European Union. Not to be outdone, the governor of Illinois has allocated over a billion dollars to the development of home grown energy products.

Don’t expect these nonsense policies to change any time soon. There may not be many farmers in the agriculture state, but each has 2 senators and that counts. Even though ethanol is more expensive to make than gasoline, it gets a 50 cent per gallon subsidy and a mandate that it must be used as fuel. Corn growers love it.

Big oil, for most Americans, means companies like Exxon Mobil, which makes headlines when it makes a few bucks and increases the value of retirement funds. However, over 90 percent of the world’s oil is controlled by national oil companies like Saudi Arabia or the government of Venezuela. Of the 20 largest oil firms, 16 are controlled by governments. Saudi proven reserves could supply the needs of the entire world for decades. It can produce at its current rate for 70 years without discovering any new fields. Only 2000 wildcat wells have been dug in the gulf compared to a million wells in the US they aren’t looking very hard.

These oil companies are poorly run and inefficient. This can be very wasteful – consider that not many years ago Russia, now one of the largest exporters of oil, had to import oil until western technology was invited in to correct their mistakes. As governments like that of Mr. Chavez in Venezuela squeeze out profits and also foreign expertise, potential oil production is lost just as it was in Russia. In the future, these government oil companies will become even more important to our oil supply as we exhaust parts of the globe that are open to competition and better extraction technologies. The oil we need will be there, but getting it will be more of a political issue.

Oil prices are falling, giving a financial and psychological boost to consumers. Down from a record national high average of $3.04 per gallon in august to under $2.50 now. Prospects for further declines are excellent, as the cost of oil has fallen from a high of $77 a barrel to about $60. We burn over 200 million gallons of gas a day, about 2 gallons per worker, so a 50 cent decline in gas prices puts $100 million dollars back in the pockets of consumers every day. That’s a chunk of change.

Government of course remains the big winner, since it collects nearly 50 cents a gallon in taxes regardless of the pump price. Oil companies wish they could make that much per gallon.

As the economy weakens, falling gas prices are like a tax cut and that will stimulate domestic spending as we send less tribute to the owners of oil. This raises the odds that the Fed can oversee a soft landing, but the economy is going to slow, so be prepared.

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Bill Dunkelberg, a member of the Board of Directors of the Commonwealth Foundation, is professor of economics at Temple University.