The F-35: Poster Child for Pentagon Boondoggles

The F-35: Poster Child for Pentagon Boondoggles

07/02/2019Gary S. Goldman

Congressional lawmakers may need a primer on the meaning of a “budget.” As the average American family knows all too well, a budget is the way to determine what you can afford to spend. A family that exceeds its budget usually decides that it needs to eliminate wasteful spending.

But instead of cracking down on waste, some lawmakers want to double down. The wasteful program, in this case, is the Joint Strike Fighter, a warplane known as the F-35. The Trump administration, in its most recent defense spending request, asked for enough funding for 78 of these jets. As we’ll see, that was already a huge waste.

But lawmakers on the House Armed Services Committee want to spend even more than that. In the annual, must-pass National Defense Authorization Act, the committee: “Authorizes $10 billion to procure 94 Joint Strike Fighter aircraft, an additional 16 aircraft above the administration’s request.” Lawmakers say this spending will allow “the forces to modernize and equip themselves with the most advanced and capable fifth-generation aircraft.”

That would be great, if it was true. But the history of the F-35 tells a much different story.

First, let’s note that the entire program has been over budget almost since it was conceived in the 1990s. That’s partly because the military wanted one type of plane that could accomplish several different types of missions for three branches of the service. As the RAND Corporation later found, trying to build a one-size-fits-all platform meant spending more than building three separate platforms would have.

Over the years, the plane failed test after test, and had to be retrofitted at a cost of additional tens of billions of dollars. “The estimated total price for research and procurement has increased by $22 billion in current dollars adjusted for inflation, according to the Pentagon’s latest annual cost assessment of major projects,” Bloomberg reported back in April. “The estimate for operating and supporting the fleet of fighters over more than six decades grew by almost $73 billion to $1.196 trillion.”

Second, the military and contractor Lockheed rushed the F-35 into the air, building new jets before the prototypes had completed their shakeout flights. When new problems, with both software and hardware, inevitably cropped up, planes had to be taken out of service and fixed.

Finally, while they were good at running up a tab, the planes don’t deliver value for the money.

It’s not clear that the jet, when it does fly, is even effective. For example, the Air Force is using much older planes in some deployments, because it wants its jets to be seen (and therefore feared). The F-35 doesn’t effectively project force. Far from becoming an effective weapon, the F-35 is proving to be a fragile one that cannot accomplish its missions.

Before he took office, President Trump promised reform. “The F-35 program and cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20th,” he Tweeted. His administration isn’t exactly delivering, but it’s not too late for lawmakers to reconsider.

One committee staffer recently told reporters that lawmakers want to collect more information about the F-35 and other weapon programs. “It’s been a while since we’ve seen an independent cost estimate from the services.” If the military will provide fair information about the cost of the F-35, lawmakers could still enact a sensible budget that would slash wasteful spending on this plane.

Gary S. Goldman is the nationally recognized host of “Business, Politics, & Lifestyles” a weekly talk show airing on WCRN 830 in Metro Boston MA. Learn more at garyonbpl.com.

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Yes, Criminals Respond to Incentives, Too

“Can we film the operation/Is the head dead yet/Get the widow on the set/We need dirty laundry,” sang Don Henley in 1982. Crime stories grab people’s attention more than almost anything else. What do the stats say for San Antonio?

As Mr. Henley’s “Dirty Laundry” continues, “kick ‘em when they’re up/kick ‘em when they’re down”: they’re all over the place in the last dozen years. A couple of isolated spots do pop out. 

Violent crime shot up 28 percent and 26 percent in 2013 and 2016, respectively. Then it took a 17 percent dip in 2018, accompanied with a 9 percent drop in property crime. It’s notable that the economy started growing more the year before, both here and in the broader U.S. 

When more people are prospering, fewer are committing crimes. 

But then crime rose again in 2019: 13 percent for violent crime, 10 percent for property crime. Incidentally, starting in 2018 was Bexar County’s cite and release program (CR).

Maybe it’s a coincidence, maybe not. Take that economic growth though. 

There weren’t large-scale measures or actions taken that had time to fully wend their way positively through the system. But a friendlier tone had taken power. 

Signals were sent, and those matter, particularly for investment. Investment leads to hiring. And if more people are getting hired, fewer people are committing crimes.

The CR sent a different signal … kinda. The part that deals with marijuana could actually be augmented by other voluntary and/or consensual activities. 

What is the logical basis for stripping someone of their freedom or property when what they do harm to no one else? If there is no collateral damage, where is the wrongdoing?

This is unlike when one party assaults another, including minor aggressions like defacing property.

Not only should such infractions be removed from any CR, but punishment by fine should be abolished. Otherwise, it amounts to little more than a rich man’s crime. Restitution for the victim should factor in, but time behind bars should be mandatory.

Is there a greater disincentive to bad behavior than a night in the pokey? As it is, the faulty half of the CR is subtly wreaking havoc.

Those with confidence in the ability of government to do good put outsized faith in bad actors who clearly lack good intentions. Not only does this include a blind spot to fraudsters who seize on public spending, but also those who see a criminal justice system with soft spots.

When you excuse minor criminal acts, you invite more of it, oftentimes on a larger scale.

Citizens are starting to regret this approach. None other than San Francisco recalled their district attorney earlier this year. The broader movement of these lenient approaches is showing signs of weakening as well.

Preliminary reports this year show a spike in homicides and aggravated assault to the tune of 27 percent each. Are Bexar County residents feeling buyer’s remorse, too? Would a new district attorney revamp the CR to be more respectful of freedom and property? 

Only the candidates and the voter know. 

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As the Economy Tanks, Will the Fed Pivot or Stay the Course?

09/29/2022André Marques

On September 21st, the Fed announced another 0.75 percent rate hike. The target is 3 percent to 3.25 percent. The annual rate of the CPI went down in July and in August, standing at 8.3 percent. If we consider the methodology used in the 1980’s, the CPI also went down in the last months, but it is still above 15 percent, according to Shadow Government Statistics.

This decrease in the CPI is due, partially, to the use of oil from the Strategic Petroleum Reserve and the fact that the monetary aggregates have stopped increasing. Since the Fed is no longer buying government bonds and mortgage-backed securities (MBSs), the monetary base (M0) and its balance sheet are not expanding. In fact, the balance sheet has been slightly contracting since April, and M0 follows the same pattern (chart 1). M1 and M2 also stopped increasing, with a slight contraction since March after a significant increase in 2020 in 2021.

Chart 1 – Fed’s Balance Sheet and M0

Fed’s Balance Sheet (Green); M0 (Red).

Source: St. Louis Fed.

This latest 0.75 percent rate hike took the IORB (Interest Rate on Reserve Balances), which is the main rate that the Fed uses to influence the FFR (Federal Funds Rate), from 2.4 percent to 3.15 percent.

Chart 2 – FFR, IOER and IORB

FFR (Red); IOER (Green); IORB (Orange).

Source: St. Louis Fed.

Jerome Powell stated in March that, if necessary (to contain the CPI), the FOMC would resort to hikes higher than 0.25 percent in future meetings. And, so far, this is what has happened.

As in Chart 1, by the end of July, the Fed's balance sheet had barely shrunk (the Fed's assets were down by less than 1 percent). And, between the peak reached on April 13 and September 21, it shrunk by “only” $148.7 billion. However, the Fed said it will continue to reduce its assets, as announced in May. It also stated that it is determined to bring the CPI back to the 2 percent target and it is committed to continue raising rates by 0.75 percent.

The peak of the FFR in the last rate hike cycle (2015-2018) was 2.4 percent. In December 2018, there was significant turbulence in the US stock market (and started cutting rates in 2019), and in September 2019 there was a crisis in the repurchase market and the Fed started to inject liquidity into it (doing QE and expanding its balance sheet). The FFR reached 2.4 percent again last July and now it stands at 3.15 percent. Does this mean the Fed can continue raising rates without consequences? Unlikely. In the last rate hike cycle, the Fed was not only raising rates, but also shrinking its balance sheet at a higher pace, which further limited the extent to which the Fed could raise rates (since the sale of assets held by the Fed made its prices go down and its interest go up). The Fed began to shrink its balance sheet in late 2017 (and went back to expanding it in September 2019). As for the FFR, the Fed started raising it in December 2015 (but went back to cutting it in H1 2019).

Real interest rates are still negative. Even if we consider the official CPI of 8.3 percent, the real rate is -5.15 percent. In addition, another important factor that that Fed needs to address in order to bring down the CPI is the money supply. In FY 2022, total government spending was $5.35 billion. The government is still spending money on COVID-related “stimulus”, Congress has passed yet another spending bill, and we have yet to see the impact of student debt forgiveness (as the government will have to borrow more to fund it). And let’s not forget that a higher IORB means that the Fed have to pay more interest on bank reserves, which means lower profits for the Fed, which means less of these profits will be given to the government, which means that the government will have a higher budget deficit if it doesn’t raise taxes, or it doesn’t cut spending.

All this means more indebtedness, that is, more bonds issued by the government that can eventually be purchased by the Fed (since, likely, there will not be enough demand for these bonds at the current FFR level, as expenses that the federal government is incurring with interest on debt are increasing). Even in a scenario in which the central bank does not raise rates, the increase in government indebtedness tends to increase interest expenses. But this is compounded when the central bank is raising rates. If the government continues down this path, the Fed will have to decide whether to continue to raise rates (which will increase the government's interest expenses) and to shrink its balance sheet (which means that the Fed will be increasing the supply of bonds, further decreasing their prices and increasing their interest), or to give up on this plan and go back to cutting rates and increase its balance sheet to prevent the government from being unable to finance these expenditures. Historically, the second option is the one chosen by the Fed. It remains to be seen if the current scenario of a higher CPI will be enough for the Fed to break this tradition.

The US economy is not in a great shape and it is being questioned (here and here) whether the Fed will keep on its promise or if it will pivot.

GDP contracted 1.6 percent in Q1 and 0.6 percent in Q2, which constitutes a recession (two consecutive quarters of negative GDP), despite the fact that the government is trying to change this consensus to deny a recession. And the Atlanta Fed has lowered its Q3 GDP growth forecast to 0.3 percent (it's still positive, but it's common for the Atlanta Fed to lower its forecasts as new data comes in). However, it is true that, if we consider a more “official” definition of recession (from the National Bureau of Economic Research – NBER), the US was not in recession at the end of Q2. The NBER, in addition to considering the period of economic contraction that must take place to be considered a recession (more than a few months), considers the diffusion (the contraction must be spread across many sectors of the economy) and the depth of the contraction. And, from December 2021 to the end of Q2, all variables used by the NBER were positive.

Nonetheless, it is undeniable that the economy is contracting (or at least it is barely growing).

The housing market is contracting (although the Fed has not yet reduced its holdings of MBSs; the Fed has only reduced its holdings of government bonds and even slightly increased its holdings of MBSs – chart 3), as mortgage rates go up.

Chart 3 – Assets in the Fed’s Balance Sheet

Total Assets (Purple); MBSs (Red); Government Bonds (Green); Federal Agency Debt Securities (Orange*).

* It is not possible to see the line at this scale, because it is a figure of “only” US$ 2.3 billion.

Source: St. Louis Fed.

The CPI is outpacing wage raises, so real incomes are getting lower and consumer credit is going up.

Some yield curves are inverted. That is, the difference between the interest rates of bonds of longer maturity and bonds of shorter maturity is negative (usually they should be positive, since bonds of longer maturity must pay more interest as they are riskier than those of lower maturity). Historically, yield curve inversion is a leading indicator of recession (which usually occurs sometime between 6 and 24 months after the inversion). If bond investors expect a recession, they anticipate that the central bank will cut rates. This expectation causes long-term rates (10 or more years) to decrease in relation to those of shorter maturity, inverting the yield curve. Of course, this is not an accurate indicator and does not guarantee that there will be a recession.

Chart 4 – Yield Curves of US Government Bonds

30 Years-10 Years (Blue); 10 Years-5 Years (Orange); 10 Years-2 Years (Green), 10 Years-1 Year (Yellow).

Source: Trading View.

And stock indexes are trending down since last October:

Chart 5 – Stock Indexes

S&P 500 (Blue); Nasdaq (Orange); RUSSEL 2000 (Green); Dow Jones (Yellow).

Source: Trading View.

All these factors are indicators of a weakness in the US economy. The question remains: Will the Fed pivot?

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A Victory for Europe’s Right in Italy

As predicted, Italy made history Sunday, electing its first ever female Prime Minister. Winning a preponderance of the votes cast, the Brothers of Italy’s Georgia Meloni will presumably take the helm of the E.U.’s third largest economy at the head of a coalition right wing government. Facing a daunting economic and geopolitical environment, Meloni’s government-in-waiting hopes its promised mix of policies aimed at supporting households and businesses while toeing the line against Russia will curry favor with Italian voters and the leadership in Brussels.

Or, as CNN and any number of their trusted media allies saw fit to put it in the immediate aftermath: “Georgia Meloni claims victory to become Italy’s most far-right prime minister since Mussolini.”

Cue eye roll.

Much like the also recently victorious Swedish Democrats, the Brothers of Italy and other right-wing populist parties across Europe gave voice to voters’ frustrations over inept policy decisions made by distant elites, whether in the capitals of their respective countries or in Brussels.

In cooperation with the other parties of the coalition, such as the League and Forza Italia, Meloni’s Brothers of Italy proposes supporting the “traditional family unit,” opposing abortion, and securing Italy’s borders, while continuing to support Ukraine in its conflict with Russia.

The last was a particularly contentious point and the subject of much speculation through the spring and summer, when it became clear the Brothers were going to pick up the pieces of the Italian right that had fragmented following the League’s break with the group in 2018. With Europe being absolutely battered by the energy price inflation resultant from sanctions on Russia for its actions in Ukraine, several prominent members of the coalition had voiced a mix of concern, that the sanctions were hurting Italians rather than Russians, and opposition to continuing the policy of the Draghi government, backing continued fighting rather than negotiation.

A full decade of crises has expanded the coercive powers of the E.U. significantly, however. Floating a range of potential carrots over the summer, hinting at a secret plan to hold down Italian bond yields over what is sure to be a terrible winter, by July the Brothers had already effectively made the decision to concede on the major points of European policy in exchange for aid. Apparently not satisfied, or just looking to rub it in, European Commission Chief Ursula von der Leyen let it be known that if the new Italian government after all decided to “go in a different direction” the E.U. “had tools” for applying pressure.

Despite the expressions of public outrage, the comment provoked from, among others League leader Matteo Salvini, the Italy Meloni and her coalition are inheriting is a mess. From government finances to demographic oblivion, sky-rocketing prices, waves of incoming migrants and a structurally disadvantaged private sector, with a possible five years in power stretching out before them the new government in Rome will likely try to put off any confrontation with Brussels as the ECB is the only thing standing between Italians and freezing and the government and its financial solvency.

As such, little is likely to change. Voters seemed to know as much. For all the media hysteria, Italians weren’t flocking to the polls: an historic low 64 percent turned out.

One who didn’t, according to the Wall Street Journal, was a café owner whose restaurant had survived both World Wars and COVID but was now considering closing up permanently after receiving his utility bill: up from a few thousand euros a year ago to literally tens of thousands today. There was no one he saw worth voting for, according to the Journal’s report.

Indeed.

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Powell: How Do We Get Rid of Inflation?

09/26/2022Robert Aro

After raising the Funds Rate by 75-basis points last week, Jerome Powell, Chair of the Federal Reserve, gave candid opinions regarding inflation and the detrimental effects on households. It’s rare to agree with a central banker; yet here we are. In his own words:

So, for starters, people are seeing their wage increases, their wage increases eaten up by inflation. So if your family is one where you spend most of your paycheck, every paycheck cycle, on gas, food, transportation, clothing, basics of life, and prices go up the way they've been going up, you're in trouble right away. You don't have a cushion and this is very painful for people at the lower end of the income and wealth spectrum. So, that's what we're hearing from people is very much that inflation is really hurting.

Amazing! This is the type of real-world economic analysis we desperately need. He acknowledges that in spite of higher salaries, the benefits from wage increases are devoured by inflation, or more succinctly: the purchasing power of the dollar is decreasing. While some may have higher bank account balances, it affords them less.

He also acknowledges that many family’s paychecks barely cover basics such as gas and food, and that when “inflation” occurs the impacts are felt immensely and immediately. He’s made it clear he grasps the concept.

Seems weird though. If it’s so obvious, why maintain policies explicitly perpetuating inflation?

Powell then confesses, he has no clue how to stop inflation:

So how do we get rid of inflation? And as I mentioned, it would be nice if there were a way to just wish it away but there isn't.

Incredible! We should send him a copy of journalist and economist Henry Hazlitt’s “What You Should Know About Inflation,” which offers many viable solutions. Powell could also study the countless other Austrian economists who have vehemently spoken out against inflationism as a policy tool for the last 100 years. If that isn’t enough, perhaps reflection on the last century of failed monetary policies: perpetual dollar depreciation, the relentless boom/bust cycle, and ever increasing disparity between America’s have and have nots; in which the haves benefit from large subsidies, bailouts, and access to new money programs at society's expense. However, there seems no legitimate intent to correct course.

It's the year 2022 and the Federal Reserve is still trying to unlock the mysteries of inflation, one of the most documented catastrophic policies for quite some time. Even in 1958 Mises reiterated:

The most important thing to remember is that inflation is not an act of God; inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy

The Fed claims diligence when it comes to meeting their arbitrary 2% annual inflation rate; but it comes at a heavy cost. The stock market will crash and a recess