Orrin Hatch on higher taxes and the VAT

In Politico last Friday, Senator Orrin Hatch (or some of his aides) wrote about the prospects of tax increases, including expiration of the Bush tax cuts and the enactment of a Value Added Tax (VAT). I, and I think the President, agree with the Senator that the 10% tax bracket and the $1000 child tax credit should be permanent (I actually believe the child credit should be increased by a multiple of six). Where Obama and I part with Hatch and the GOP is in their belief that raising tax cuts on the wealthy will hurt small business. They won't.

Unincorporated small businesses pay income tax on what the owners pay themselves through either salary or profit. When business owners pay other people, those people pay their own income taxes - although the business owner does collect the funds and mails them to the IRS to pay their tax liability. This is why raising taxes are not a job killer - just the opposite. If a business owner wants to minimize tax liability, they can hire someone to help with the work, presumably at a lower tax bracket than they themselves pay. Under that scenario, higher tax rates would actually encourage more employment, at least if you assume that taxation has anything to do with the decision to hire more people - rather than the standard reason - which is the amount of work to be done in order to meet customer demand. Indeed, if customer demand is key, taxing the rich, who are more likely to save than spend, would be best for small businesses because in the aggregate it increases consumption. Taxing speculation also would increase demand, since it takes away the incentive to invest in land and stock bubbles - neither of which expand the economy (stocks are a secondary market - firms rarely use stock sales to finance expansion).

Regarding the VAT, Hatch attacks it because the debate on establishing it creates uncertainty and that it would lead to European style social spending. I would counter that ever increasing deficits are producing much more economic uncertainty. One need only look to Greece and to last week's market hiccup to see this (although to be fair, much of the problem last week was a typo and the way automated trading systems reacted to it). I am also not sure what kind of additional social spending the Senator is referring to. We have already passed health insurance reform and his own party enacted a Medicare Drug Benefit with protections against price bargaining for big PhARMA. Is there anything left to do (aside from paying for these reforms)?

I guess the one thing we could do is pass gauranteed income provisions, however the Senator talked about preserving the $1000 child tax credit, which is a form of income gaurantee. We could use tax reform to increase the credit - but this would help growth, consumption and small business overall, not hurt it.

Ironically, the Senator calls for tax simplification, "to make it easier, more competitive on a global basis and friendlier to economic growth." Someone needs to tell the Senator and his staff that this is exactly what a VAT would do if it is used to replace income taxation at the lower rates and provide a simpler vehicle, such as an expanded VAT prebate paid with wages, to distribute tax credits to families.

Financial reform, ending capitalism, ending government

Today, there will be a vote in the Senate on a motion to proceed to financial reform. It may or may not pass. Ultimately, no matter what happens, it will be tinkering around the edges. Only two things would qualify for real financial reform - and neither is in this bill.

The first thing is to revoke the corporate charters of most Wall Street firms and force them to operate as partnerships. This would quickly make them risk averse, since the personal property of the partners would be on the hook, rather than simply the accumulated shares of the owners. That probably won't happen and I am not sure it should - although it would certainly end Wall Street as Casino.

The second thing is to move more quickly to employee-ownership in the economy as a whole. (The reason I can't insist on the first thing is that I can't honestly argue for employee-share ownership of Chrysler while denying it to Goldman Sachs). Employee-ownership can be expanded in two ways:

The first way would be to allow unions to sink most of their pension funds into the firm(s) that their members are employed at. This is currently forbidden under the Taft Hartley Act, primarily to stop what was seen as socialism from taking over American industry (even though that would have been the cure for what currently ails the economy). Some portion of pension funds would be invested in other firms, but safety can be achieved for less than 90% diversification if unions have enough employers to spread the risk or if many locals combine their insurance pool for a larger, more secure, fund.

The second way to do this is to use Social Security personal accounts to allow employees to invest two-thirds of their (equalized) employer contribution in employer voting stock - with the other third invested in an insurance fund made up of similarly situated companies. To make funding adequate the income cap would be blown away and employee-paid contributions would be ended, with the remaining employer contribution equalized at the average contribution. If a company's management pulled an Enron - or even started to - one quarter of the employee stock shares plus one in combination with the insurance fund shares could fire management and install a neutral manager from the insurance fund to investigate and reorganize the firm. If the firm could not be saved, employees would be paid off with shares in the insurance fund. The other feature of this reform is for unions or employee professional organizations to vote the shares of their employee-owner members rather than appointing a unitary board.

Employees at non-stock firms would buy shares non-voting shares in the insurance fund only. Even though most firms are non-stock - most employees work for firms that are, which are bigger firms.

Very quickly, most publicly traded firms would go private (under either scenario) and most employers would reorganized to become employee-owned - since the best employees would want to be owners - especially if employee-owned firms got smart and began to pay for innovation directly rather than burying it in higher salaries for "creative" personnel.

Employee-owned firms could also do what European unions do and offer financial services to their employees, including consumer debt, mortgage debt and educational debt - as well as the full gamut of insurance services. This would both encourage long term employment arrangements and lower interest rates - since employee-ownership means that interest need not be charged if there are no outside investors. Indeed, the only way to avoid peonage is to limit these tools to employee-owned enterprise.

As you can see, this would radically reorganize the financial sector. Financial sector employees would go to work for employee-owned firms. While some firms might utilize outside services, the vast majority would internalize most of their supply chain and employee-services (from finance to medical to land acquisition and home building). The entire financial sector would cease to exist as an independent entity and would no longer need to be regulated except to make sure that employee-owners are free to leave or are treated equitably if terminated.

Employee-owned firms could also offer services that replace the State. They could hire teachers to train employees' children or pay for their tuition at a public or private charter school. They would send younger employees to university and pay them to attend. They could provide involuntary mental health services to employees and family members - replacing the prison system and preventing most tragedy before it happens. They could provide additional income to larger families so that government can get out of the income redistribution business (and take it away when children leave home to remove the perverse incentive to fire experienced employees who demand more money to support their families). They could pay longer term employees with stock dividends rather than hire salaries - another way to encourage longevity. They could hire under-educated workers and send them to school as well instead of paying taxes for the government to do so. They could build employee homes in cohesive neighborhoods and provide the same services that Home Owners Associations provide (roads, road clearance, security) and even some that local governments provide (rescue and fire protection).

Employee-owned firms could even do international development - at least the ones that are already multi-national in employment or supply. Indeed, they would have to so that trade isn't used to offshore their jobs. Giving overseas workers and suppliers the same standard of living that American workers get saves American jobs by stopping exploitation. It also raises the standard of living for overseas workers generally and leads to the creation of a world-wide middle class, with the demand for local democracy and the recognition of human rights. Democracies generally do not go to war with each other, so the need for military spending goes way down and may even become non-existent - thus overcoming the need for any kind of government at all.

The only reason for any taxation would be to finally pay off the national debt and fund moving from Social Security to private ownership - although when these limited obligations are met, even income taxes can sunset.

All this would occur from repealing the Taft Hartley Act prohibitions on union control of employers and creating personal accounts for Social Security.

Time for a (Limited) Land Value Tax

Anyone who reads my comments on various sites, especially those of a libertarian bent like the Free Liberal and various mailing lists, know that I have been a frequent critic of the Georgist ideal of a Land Value Tax as a single levee. The current voice for this view is Dr. Fred Foldvary and his current and former students, including Brian Green. We enjoy our arguments on whether an LVT should be a single tax and whether now is the time for its adoption.

Land Value Taxes extract excess value from the location value of property, called economic rent. An effective LVT will negate such values and prevent significant appreciation, which works a bit like a sin tax. Most local jurisdictions do extract some land value, but not to the extent to prevent the housing bubble just witnessed. Indeed, local democracies find it hard enough to extract enough value to run the local school - and some don't even do that. Democratic theory shows why. Unless the assessors have some separation from the voters, an honest assessment is all but impossible. The other difficulty is that an effective tax decreases values over time and makes it hard to raise needed revenue - it is better for localities to allow values to increase, leave tax rates as they are and rake in the proceeds.

When a significant number of borrowers are underwater, it is probably not the time for a vigorous LVT with the goal of price stabilization. That was, of course, until yesterday. The White House has announced a procedure to allow people who are under water on their mortgage to have their principals written down. This makes it the perfect time to put in an LVT to prevent a new bubble from forming in later years. Since values usually stay low for a few years, we have time to fight about it, however the effort should start now.

Should it be a single tax? Absolutely not. Taxes should be economically linked to the activities they fund. Services to property, such as police and fire protection, corrections and mental health, and home inspection, local streets, sanitation, snow removal and rental enforcement should be paid from both an LVT and a tax on improvements (since expensive homes cost more to protect). Notice I left schools out of the mix.

School levies should come from a tax that redistributes income from all sources, not just land. While some are of the opinion that only land values make people rich, most will argue that celebrity CEOs are rich because of the economic rent they extract from worker wages rather than from the property they hold. Services to families, such as schools, remedial adult education, health care, and credits to assure a guaranteed income should come from a tax on employers. Such a tax would ideally force a just distribution of benefits and services (including tuition at both charter and sectarian schools) and not collect any revenue for the state.

A separate sales or Value Added Tax would fund the state to the extent it cannot self-fund. As a more visible levee, it would provide an incentive to reduce state activities, such as domestic military bases, weapon systems not deployed, commercial regulation and other non-entitlement general government not covered elsewhere.

An income surtax should extract income from accumulated economic rent and excess wages and inheritances, as well as activities that require further borrowing. These include overseas and at sea military deployments, net interest on the debt and debt retirement - including debt held by the government for retirees. The only out from paying such a tax (which should be on high incomes only and range from 3% to 23%) should be charitable contributions and income from selling shares to broad based employee-ownership plans.

Retirement taxes should go to employee-ownership shares and a large insurance fund holding such shares (with workers at non-stock firms paying into the insurance fund). Taxes should be employer-paid only and should be credited to employees equally, regardless of pay. Bonuses for actual accomplishment or educational attainment (rather than position only), as well as reinvestment of dividends, should go to both retirement accounts - with a protion of dividend income going to longevity increases. This removes the incentive to fire middle age workers as they get too expensive.

TEA Party Economics

Lest we forget, TEA is for Taxed Enough Already, but the question is, are they? We are getting some idea of their basic demographics, but I'm interested in something meatier. Are they, in fact, taxed enough for what they get? (They can also use these questions to look for themselves, but I doubt as a group they are that self-reflective - any members or groups are welcome to prove me wrong by surveying the membership and telling us how it went).

What is the range of their Adjusted Gross Income? What is the range of their taxable income? What is the range of their marginal and effective tax rates?

How many have FHA and VA mortgages? How many have other subsidized mortgages? How many have mortgages owned by Fannie and Freddie? How many are in subsidized housing?

How do they earn their money? How many are military or governmental retirees, current members or reservists? How many work in the defense industry or have worked there? How many get Veteran's Benefits (including free health care with presecriptions that are bought more cheaply because the VA negotiates with drug companies)? How many work building roads or are in some way in the transportation industry (road, rail or air?)

How many work for employers that take advantage of the tax exclusion of health care benefits? How many take the mortgage and property tax deductions? How many take the Child Tax Credit (regular and expanded), energy credit or other credits?

How many have businesses in an industry with special tax breaks (like oil and gas)? How many work for a business that benefits from agricultural inspection programs to make sure that the food they sell is safe? What is the value to them of this service being offered? How many benefit from agricultural subsidies up the supply chain? To what extent does that show up in their employer's or their own bottom line?

Based on their income tax liability, what is their share of the Net Interest expense of the government? (or, if they prefer, their family share based on their average family size).
What is the average benefit from each type of government activity, the total average benefit and how does it compare to their tax burden? Are they "taxed enough already"?

Feel free to add other question or suggest a researcher who might ask them in the comments section.

A Compromise on Health Care: Single Payer Catastrophic

As I wrote Wednesday nite, some type of single payer insurance is inevitable because the mandates in the law are simply too weak to have everyone buy insurance, while pre-existing condition reforms will likely bend the cost curve the wrong way and bankrupt insurers and send them to TARP for a bailout or liquidation.

We could wait for a financial crisis, or we could put through a real bipartisan reform of the reform. Of course, this means giving up on univeral comprehensive but it also means giving up on for profit insurance.

The only proposal that does this is to have single payer catastrophic insurance funded by a payroll tax. Employers would fund Health Savings Acccounts for workers and employees would fund Flexible Spending Accounts for optional services. More under the fold.

Why do both an HSA and a FSA? Two reasons - bending the curve requires that consumers notice the pain (simply allowing them to cash out savings is not enough) and abortion funding. Single payer means that all catastrophic care would be government funded and the insistence on Hyde means that without some consumer funded account, abortion services would be cash only. Additionally, an FSB could included OTC (which the reform takes out) and can be accessed for their full value on day one, while HSAs have to build in value - meaning that providers have to wait to get paid. Eventually, as HSA values increase, FSB requirements go down, however they will at least fund normal use of copays and non-covered expenses.

Medicaid and Medicare HSA contributions would be paid by the government out of the same payroll tax which funds Catastrophic (and Long Term Care) coverage and everyone would have only one Health Security Card to access all three accounts. All beneficiaries would also have the same card, so the discrimination against Medicaid beneficiaries would stop. The payroll tax should be shifted entirely to employers, allowing salary but not net pay deductions to finance this. Compromise should mean that we stop arguing about the cost and hiding the tax from most employees would do this.

Research shows that HSAs would bend the cost curve by giving consumers the incentive to shop smarter, which would save money over time and avoid the necessity of price controls. Of course, the AMA would not like this development unless we threw in malpractice reform. Then the trial lawyers get upset, so the reform must take their needs into account. Also, reform must also make sure incompetent (rather than unlucky) doctors are punished or it will never fly.

The way to reform malpractice is to have special juries with medical society participation hear these cases and empower these juries to discipline doctors, including license revocation. Compensatory damages would remain uncapped, however punitive damage caps must not be allowed to damage the due process rights of plaintiffs by allowing defendents to outspend them on legal talent. To keep the playing field level, the cap should be three times defendent legal fees or some set amount - whichever is higher. Awards would remain untaxable until all appeals are exhausted and are only taxable on money actually received - with compensatory payments remaining tax free. With a capped award, excessive award appeals will no longer be allowed and a bond against the judgment must be posted by the insurer during the appeals process.

Would insurers fight this? It depends upon the timing. At first, they might. Eventually, when their stock price starts to tank and the only way they can stay in business is to provide administrative services to the single payer plan, they will likely come around.

I would offer one further loophole, throwing a bone to the die hard libertarians. Employers can opt out of single payer by prepaying hospital and specialist services at their employees' preferred hospital and by hiring their own doctors to treat employees and their families onsite. This would also take care of the cost curve and is similar to how we deliver health care to the military, veterans, Congress and the President. If retirees are allowed to keep the same coverage and long term care coverage is provided separately, this should also be deductible. Some tax for services to the poor would still have to be paid, however, so there won't be a total opt-out on the payroll tax.

Now that we have health care reform, there is no longer any advantage to the Republicans to avoid negotiation - of course, they may be too partisan to realize this and are so badly staffed with PR specialists that compromise proposals have to use small words - but that should wear off when they realize they've just made themselves look dangerous and foolish and that, if they really care about the cost curve, they have to play ball.

Why should the Democrats negotiate? Some of us still want single payer and believe that the for profit model can't work for much longer. Circumstances will prove us right in less than a decade, however there is no gaurantee of having sixty Senate votes when it finally does. Also, single payer alone only bends the cost curve through capping fees while the approach I have outlined is more likely to bend fees without price controls. Like it or not, we own the debt that we inherited from Dubya and bending the curve is likely the only way to avoid catastrophe.

The Inevitability of Single Payer

Cross-posted from Daily Kos from two days ago:

I see that there is still activity around seeking a public option in reconciliation. I think this is a mistake. If you are going to offer any grudge amendment from the left, offer one to make TARP money available to health insurers in financial difficulty and give the USG the authority to liquidate operations as it sees fit. The USG should see fit to start offering its own insurance plan which will grow and grow until it eats everyone else. (Of course, there was not such amendment, but the analysis still applies, which is below the fold).

How will Single Payer happen? Its pretty obvious. The Republicans knew, it seemed, but were not clear. They spent too much time on historionics and not enough time explaining their position - that reform is a prelude to real government run health care - either a single payer Canadian system or a British national health service. They left people with the impression that if you give the Democrats an inch, they will take a mile. That is not how it will happen, however.

Here is what I told the White House, the Senate Finance Committee and the House Ways and Means Committee majority and minority staffs:

"The main attraction of single payer comes from the nature of commercially provided insurance to seek profit, and how that effects the delivery of service. The problem is that even with all of the consumer responsibility you can think of, the drive for greater and greater profits will have insurance companies constantly searching for ways to avoid paying for the care they promise their policy holders.

Firms are less concerned about deductible levels as they are about how to avoid paying for serious chronic illness. Patients with several risk factors, such as a high BMI and advancing age, are not attractive to insurers since they detract from the bottom line due to the possibility of stroke, diabetes, heart attack et al.

If insurers must cover everyone and can't charge potentially sicker people more, their ability to increase profits over time (which seems to be the goal of privately held firms) will be greatly impacted. In the end, their business model will not handle covering everyone at a market rate. This will lead to either consolidation (until they can't consolidate anymore), bail outs or the offloading of the sickest to some kind of public fund.

In other words, single-payer insurance is almost inevitable - whether by government mandate or because of the natural tendencies of the market. Does this mean Congress can pass single payer healthcare now? It would be extremely unlikely for the industry or Congress to be that forward thinking. The best thing measure at this time is to pass something now and let events develop. If and when the bottom falls out of the industry, however, Government must be ready with some kind of single payer proposal."

Private insurance is doomed. (The Bill is now law, we can say it now). It will be doomed faster if mandates are found unconstitutional or are inneffective to really force participation (especially if you can drop coverage until you get sick).

If the GOP had said this more clearly, rather than sounding like a bunch of conspiracy nuts, they could have stopped the inevitability of single-payer, which will come about once the insurance industry starts running to TARP after their stock price starts to tank.

My advice if you have a small fortune and want a big fortune is to buy a CDO betting that within 10 years the Insurance companies will go to TARP and be liquidated (or be ready to sell their stocks short).

If we want real, sustainable, health care reform it is time to realize that we need a payroll tax or a VAT to pay for it. More importantly, we need to start spreading the word that private insurance is doomed. The more we say it, the more it is true and the quicker we get real reform.

Tell Cramer and give him a big Booyah! from me.

Paying for McCain/Boehnercare

In the lead up to the health care summit between the congressional Democratic and Republican leadership and the White House, the GOP plan and the President's plan were compared. It was an apples to oranges comparison, however, since the GOP plan was not fully fleshed out - not in terms of details but in scope. That plan (which has been taken down from the GOP web page) included an expansion of SCHIP, Medicaid reforms and malpractice reform, however it did not flesh out comprehensive reform which would have bent the cost curve.

The closest the Party has come to that was the John McCain proposal from the 2008 campaign, which would have provided a tax credit large enough for catastrophic health care, taxed all other health care coverage and provided for(presumably) tax free Health Savings Accounts. This reform would have effected every American rather than reforming around the edges. By providing a credit rather than a tax exclusion, however, it would have been more expensive if it were universally adopted - since no one would retain comprehensive insurance or employer provided insurance coverage - although most would not have been happy with such an option. Given the Republican allergy to progressive taxation, this plan would have either increased the deficit still further or would have required some form of payroll or consumption tax (maybe a Value Added Tax) to fund it.

This actually sounds like something I once proposed, since according to economic theory, such measures would be necessary to bend the cost curve (although the total price tag would be just as high as Obama care once you finished adding up tax credits and exclusions). How much it would bend the curve, however, is seriously disputable. Health care is not a "normal good." It is a good that makes consumption of other goods possible, at least in dire situations. You cannot buy a car if you are dead or disabled. Such non-normal goods do not respond well to supply and demand - especially if one has guaranteed access because one has an insurance card and a Health Savings Account/Flexible Spending Account. Except for elective procedures, there is absolutely no incentive to hold back on getting the best and most expensive care possible. I am also fairly sure that we do not want people to make such choices anyway.

Comprehensive insurance looks like it costs about the same as a catastrophic tax credit/HSA combination - at least from the fiscal standpoint - while not providing the same level of coverage.

Would such a plan be more popular than Obama care? Given that most people would be dropped from their comprehensive insurance as the tax exclusion for it goes away, I seriously doubt it.

The Bindners on the Middle Class

For those who only watch FoxNews, I was on American Morning's story on the middle class in distress. You can see it here http://cnn.com/video/?/video/politics/2010/02/22/costello.middle.class.cnn My wife really did let me talk, however I ended up on the cutting room floor.

Are we coming out of a Depression?

Many are calling the recent economic downturn the Great Recession. My question is, was it something more? Some have proposed that a downturn must last for two years to be considered a depression, although there is not univerally accepted definition. Given that today, unemployment topped 10%, housing values are still in decline (indeed, the recent spate of buying has been at fire sale prices and no uptick is in sight) and the under-employed are measured at 17%, which means that less than 75% of the potential workforce is fully employed.

I think we should reconsider the issue. Perhaps a twelve month downturn is enough, especially if housing values fall to the extent that they have. Without heroic action by the Federal Reserve and the Bush Administration, with continued action by President Obama, this would have been a depression. If the natural progress of the economy would have taken us into a depression, I think we deserve to call it that. I believe it is finally safe to do so, since temporary employment has started to rise, the stock market has begun to recover and some firms are attaining newfound profitability.

Health Care Reform and Tax Reform

Here are the comments I sent to Senate Finance in May on their Roundtable, which for some reason they did not post. I think this probably scared them a bit, since it makes sense. The other option, which I have been posting more recently, is to drop mandates to cover and keep sick people in exchange for automatically enrolling them in a public option and having the denying insurance carrier pay 70% of their premiums. I shared that with the Health Insurance lobby. I wonder how they will react?

The sumbission to Senate Finance is below the fold.

Chairman Baucus, Minority Leader Grassley and members of the Committee, thank you for the opportunity to submit comments on this topic. Those who follow the work of the Center will recognize most of these proposals in an earlier form, as they are quite similar to recommendations I submitted to the President’s Task Force on Tax Reform in 2005, which were copied to the Committee. Given both the current state of the economy and our new President’s stated intention to pass health care reform this year, these proposals are as timely as ever.

The two key components of meeting these challenges are cost control and the use or impact of public finance, which will be addressed in order. I will also address the prospects for single-payer insurance.

Cost Savings

One of the most often proposed methods of cost control is a combination of high deductible insurance (H.D.I) and health savings accounts (H.S.A.). I am personally very much acquainted with this modality, because it is the one currently used by my family for health care. In its current form, there are a few problems.

The chief problem is that this model does not automatically assure universal coverage. Insurance providers are as averse to the coverage of pre-existing conditions in a high deductible plan as they are with a comprehensive plan. Unless pre-existing condition clauses are eliminated and community rating mandated, older and less healthy Americans will find health care coverage as elusive and as expensive as the current system.

A second, but equally important, difficulty with this model its implicit rationing function. While employer financed H.S.A. balances are building, patients must either finance health care out of pocket or delay tests and procedures. This feature limits use of this tool to only those who cannot afford comprehensive coverage, instituting an implicit class system in medical coverage. Luckily, there is an easy fix for this problem.
Assuming that health savings accounts are designed to meet half the catastrophic deductible, an employee-paid flexible spending account could be used for the other half of the difference. To meet the demand for optional care, flexible spending amounts could be set even higher, depending upon the insured’s willingness to pay. Most flexible spending accounts contain a credit feature, meaning that on day one of the coverage year, participants are entitled to use 100% of funds to be collected that year. This mitigates some, if not all, of the rationing problem cited above.

A further difficulty of both H.S.A. and F.S.A. systems are the requirement to document services and submit varying forms of payment. Smart payment technology could be used to end these documentation requirements in much the manner proposed by the Clinton Administration in 1994 with a consolidated Health Security Card. Note that to be feasible, the combined monthly cost of a HDI/HSA/FSA should be no more than Comprehensive Insurance.

Note that this modality will decrease overuse of the system, provided that Health Savings Account balances and a portion of Flexible Spending Account balances can be carried over from year to year. Having some portion sunset incentivizes preventative care. Allowing greater carryover from year to year allows participants to lower contributions in a subsequent year by limiting current use while assuring that adequate balances remain to cover required deductibles.

Finance

Comprehensive tax reform must be considered as an option to finance comprehensive health care reform. The TEA Party movement underscores public aversion toward the annual ritual where citizens disclose every financial detail to the government. Any health insurance reform which increases this annual invasion of privacy will likely be considered unacceptable as well. The most obvious reform simply shifts the annual reporting obligation from the individual taxpayer to the employer, who already provides limited information and the majority of collection. The easiest way to do this is to broaden the Corporate Income Tax to include the taxation of wages and expanding payment to all forms of business ownership - with separate forms and filings for personal and business income taxation. All payroll taxes could be included, with the exception of Old Age Insurance and the portion of Survivors Insurance which go to retirees. For both employees and employers, this amount is roughly equal to 5.2% of payroll under the income cap and 2.9% of payroll over the cap. The resulting Business Income Tax would include the funds currently collected under Corporate Income Taxes, non-retirement payroll taxes and all personal income taxes collected at or below the 25% rate, including the first 25% of the higher 28% (permanent 31%) and higher rates, leaving tax rates of 6%, 11% and 14.6% (assuming use of the rates in permanent law) for high income individuals.

This plan is similar to the Value Added Tax (VAT) proposals of Professor Michael Graetz of Yale and Len Burman of the Tax Policy Center of Brookings/Urban, except that expansion of the Business Income Tax will require no new infrastructure to implement. Inclusion of a VAT component, where the VAT tax is listed in the purchase price and the BIT is left undisclosed, allows collection of a lower BIT, allows exporters to avoid paying taxes for services which benefit domestic consumers and assuring that all citizens are aware of a tax obligation (which serves as a disincentive to demand further spending. I recommend that the VAT be set in the 5%-15% range and be dedicated to CONUS, Alaska and Hawaii military expenses, veterans affairs and non-entitlement domestic discretionary spending.

Business Income Taxes would cover the financing of comprehensive health coverage, non-retirement/retired survivors entitlement spending from payroll taxes (Medicare, Unemployment Insurance, non-retiree Survivors Insurance, Disability Insurance), the general fund (Medicaid, TANF, Food Stamps, Energy Assistance, Housing Assistance), and the majority of tax subsidies directed at families (employee sponsored insurance, the Child Tax Credit, tax exemptions, the standard deduction and itemized deductions such as mortgage insurance) and businesses (although industry specific tax breaks would only be distributed after those subsidies directed at families were exhausted). Tax subsidies for families could be distributed as an addition to wages under this tax, rather than as an offset to payroll taxes as Michael Graetz proposes. Additionally, such entitlement subsidies as Food Stamps, Section (8) and Energy Assistance could be eliminated by assuring a large enough family income subsidy. Certain tax subsidies would naturally be done away with. Efforts at harmonizing tax structures with state income and sales tax systems would eliminate the need for a separate deduction for state taxes. The tax exemption for personal income tax would be raised to $75,000 for individuals and $100,000 for families to assure that only high income individuals pay these levies.

The Child Tax Credit could be expanded and retained to more effectively supplement the income of families, replacing deductions for dependents, the Earned Income Tax Credit, and any VAT rebate. If the Administration, the pro-life movement and Catholic Democrats are really serious about reducing abortion, the Child Tax Credit could be greatly expanded to $500 per month per child or dependent spouse/parent. This would lead to an increase in pay for poorer families and a shifting of how wages are distributed between tax benefits and base pay for higher income individuals, with a slight income loss for childless workers. This income loss removes the perverse incentive to terminate workers with families and other older workers who, even though they are more productive, are much more expensive than more recently trained entry level personnel. The expanded Child Tax Credit might also a replacement for mortgage subsidies in the tax code, provided the credit is set to a high enough level to allow more people to qualify for a mortgage in this uncertain market. Finally, paid and unpaid participants in workforce development programs, university education and adult literacy programs would receive the Child Tax Credit if they have dependents – rather than having to apply for a variety of income supplement programs for food, energy and housing.

Unlike Len Burman’s proposal, funding comprehensive health care reform with a business income tax retains the deductibility of employee sponsored health insurance and health insurance purchased by individual tax filers (both sole proprietors and partners). Provided the pre-existing condition reforms above are enacted, no separate voucher system will be required to prevent the cherry picking of insurance subscribers. Also unlike Mr. Burman’s proposal, Medicaid and Medicare would continued, although employers could be given an additional tax credit to fully cover all retired former employees rather than pay a portion of the B.I.T.. Such a proposal would assist manufacturers with large legacy health care costs as well.

The final BIT. Rate will be high, even with an offset for a V.A.T. However, most of the tax rate would be offset by payments to or for employees, so the amount reaching the United States Treasury would be relatively small, which provides a rationale to use a B.I.T. rather than a V.A.T. Having a separate V.A.T. also finesses the question of an alternative minimum tax (existing AMTs on both Corporate and Personal Income Taxes should be repealed). Note that this change should also include a dramatic increase in the minimum wage, so that no worker is employed simply to collect tax benefits and not a separate income. Should the tax benefits accruing to families for health insurance and the expanded Child Tax Credit exceed obligations under the B.I.T., V.A.T. receipts collected by the firm could be used to offset the difference.

Most employee would no longer file taxes under this scheme. Rather, employers would send notices to each employee informing them of the credits taken in their names for verification. The Internal Revenue Service (either federal or state) would generate a companion notice based on the employers filing, which would also be sent to the employee so that the two may be compared. Employees will be advised to contact the I.R.S. if the amounts do not match, particularly if the employer claims more to the I.R.S. than is actually paid. The Government will then make up the difference and bill the employer, with penalties. This also provides a partial check against systematic fraud, as returned notices would be investigated, as would multiple notices going to the same address.

The BIT and VAT would raise almost all of the income required for government operations. The simplified high income personal income and inheritance tax would cover net interest, debt repayment (including to the OASDI Trust Fund), foreign aid and overseas military and naval sea operations. The only deductions would be for charitable contributions and income from assets sales to a qualified employee stock ownership program.

Inheritances could no longer be separately taxed. Rather, withdrawals from inheritances, with the exception of sales to a qualified broad based employee ownership plan (either ESOPs or Stock Grants), would be taxed as normal income. Assets which are not sold and non-cash personal use assets over a certain value (clothing, cars, jewelry) would be exempt from tax unless they are sold (to be exempt they must be registered at probate).

This tax would only be levied while there is debt outstanding and the need for the projection of American military power. Should those needs ever cease, the tax would be suspended. The possibility that this might occur will encourage both a restrained military posture and higher tax rates to more quickly exhaust the national debt.

Single Payer

The outbreak of street theater at the Round Table testify to the demand for single payer insurance. Given the current political influence of the health insurance and pharmaceutical industries, it is no surprise that this modality is not under active discussion. Additionally, the advent of single payer insurance do not answer the funding question. A single payer modality both complicates and simplifies the question of funding. The complication is that the modality would be quite a departure from the current status quo, while the simplification is that it directs the focus of payment to either a payroll tax or a business income tax. While single payer is certainly compatible with the funding model proposed here, or the use of a health care VAT as proposed by Len Burman, other delivery models can be used with these funding models as well.

The main attraction of single payer comes from the nature of commercially provided insurance to seek profit, and how that effects the delivery of service. The problem is that even with all of the consumer responsibility you can think of, the drive for greater and greater profits will have insurance companies constantly searching for ways to avoid paying for the care they promise their policy holders. Firms are less concerned about deductible levels as they are about how to avoid paying for serious chronic illness. Patients with several risk factors, such as a high BMI and advancing age, are not attractive to insurers since they detract from the bottom line due to the possibility of stroke, diabetes, heart attack et al. If insurers must cover everyone and can't charge potentially sicker people more, their ability to increase profits over time (which seems to be the goal of privately held firms) will be greatly impacted. In the end, their business model will not handle covering everyone at a market rate. This will lead to either consolidation (until they can't consolidate anymore), bail outs or the offloading of the sickest to some kind of public fund.

In other words, single-payer insurance is almost inevitable - whether by government mandate or because of the natural tendencies of the market. Does this mean Congress can pass single payer healthcare now? It would be extremely unlikely for the industry or Congress to be that forward thinking. The best thing measure at this time is to pass something now and let events develop. If and when the bottom falls out of the industry, however, Government must be ready with some kind of single payer proposal.

Begging the Question

The New York Times thought fit to print this essay by economist Robert H. Frank entitled "Flaw in Free Markets: Humans." To some extent, Free Liberals might respond "And...?" Depending on one's definition, of course markets and the people who make them up are not "perfect." Frank has set us up for failure with a colossally one-dimensional straw man.

The honest observer might do a follow-on essay "Flaw in Government: Humans." We could read them both and recognize that we've a long way to go before stumbling on the truth, because, quite self-evidently, neither essay would be in spitting distance of actual truth.

So, we soldier on....

-RC

ObamaCare and America's Current Entitlement Problem

Too often when describing the size and scope of the United States government, we use massive numbers that are not relevant to regular people in their daily lives. The Center for Individual Freedom has produced an excellent video (below) to illustrate the problem and how government-run medical reforms now moving through Congress would affect average families.

Cash, er...IOUs for Clunkers

I really haven't blogged about the government's "Cash for Clunkers" program in which federal taxpayers give purchasers of certain automobiles from $3,500 to $4,500. The program is based on such transparently bad economics that it really didn't merit any mention. Of course, politicians, those who take money from one group of people and give it to others, have justified the program based on its popularity. Dropping money our of airplanes would be popular as well, at least if you are one of the lucky people standing on the street as the planes fly over.

But, as is so often the case with government, what they say and what they do are two different things. This report from Maryland explains that fewer than 2 percent of claims for reimbursement in Maryland have been paid by the feds. Of course, government officials are blaming dealers for "submitting incomplete claims, which in turn cause delays."

It is no surprise that car dealers, most of whom until recently were not experts in filling out government paperwork might not dot all the i's and cross all the t's required by the bureaucrats. I'm not sure how this situation will play out, but it seems quite likely that many dealers will lose out on thousands or even millions of dollars while the government reimburses other people who take advantage of the system.

The real story is that this is the way government works all the time. It's not just health care, but "cap-and-trade," Social Security, Medicare, and nearly all programs administered by the federal government that are not found in the US Constitution.

Why Finance Wizards are Evil

Why are MBAs so evil? Why do they keep milking America’s great companies dry? Why do the financial wizards rip off retirees and other investors with obscure financial instruments and concealed pyramid schemes?

What do they teach MBAs in college anyway? Amorality 501? Do they hold secret convocations where the elite students sign their names in blood to some Bavarian Illuminati oath in order to join the Rockefeller family termite chart?

Not quite. The real reason is more mundane, but harder to understand without some math. The real reason can be found in this Dilbert cartoon I came across the other day in my calendar.

Present value: an evil concept that renders global warming moot and the fires of Hell a distant irrelevant nightmare. Finance wizards live by present value.

For non-MBAs let me explain. Present value is running compound interest in reverse. Suppose you can reasonably expect to make 5% on your money. If you have $1000 dollars today, this is the same as $2653 dollars twenty years in the future. That is, we multiply $1000 by 1.05 twenty times, $1000 * (1.05)²⁰. In other words $2653 dollars 20 years in the future is equivalent to $1000 dollars today, $1000 = $2653/(1.05)²⁰. Or if we start our analysis looking at $1000 in the future, the present value of $1000 twenty years hence is $1000/(1.05)²⁰ = $376.89.

But that’s mere first level MBA arithmetic; for true finance wizards we need a more aggressive compounding rate. Let’s use 10% for the elite – or those who believe themselves elite -- finance wizards. For them $1000 twenty years hence is the same as $1000/(1.1)²⁰ = $148.64. Wizardry at finance leads to discounting the future. Who cares about melting icecaps? That’s a hundred years down the road!

And who cares about eternity? Most of eternity is a long way away. Eternal agony in Hell is intimidating to financially ignorant rubes because they add up the years of agony and come up with infinity. Finance wizards know better. Each year into eternity needs to be divided by another factor of 1 plus the interest rate. Those who remember their second year algebra should recognize this as an infinite geometric series with the common ratio r as 1/(1 + k) where k is the interest rate expressed as a fraction. Dust off your old algebra textbook and you will find that such as series converges to a/(1-r) where a is the value of the first term and r is the common ratio. Let a be the annual agony of Hell and r be the aforementioned 1/(1+k) and you get total agony A = a(1+k)/k, or a(1.1)/.1 = 11a for a 10% compounding rate.

Eternity is a mere factor of 11! While bad, this is finite. Throw Pascal’s wager out the window. An agnostic MBA has little to fear from Hell. With a low but finite probability of a medieval-style Hell, evil today look’s like a pretty good bargain. And MBAs are trained to look for bargains.

Even a Christian MBA might opt for evil if he’s young enough. If expected death is 25 years away, we discount the factor of 11 by (1.1)²⁵. 11/(1.1)²⁵ = 1. If today’s pleasure from evil outweighs the agony of a year in Hell, then go for it. For a Christian believing in a medieval Catholic vision of Hell, it’s still a no-go, but for members of modern watered-down feel-good churches, the numbers look good. (George W. Bush = Methodist with an MBA. Hmmmmmm.)

Evil is a bigger bargain for those Biblical literalist MBAs who note that the traditional conception of Hell is likely a translation error ; that is, those who believe that most of the dead sleep until Judgment Day, with the good receiving eternal life and the evil being burned up in a big garbage dump. For them, we calculate the value of everlasting life in the future vs. the benefits of evil now. We apply the same geometric series analysis to eternity, but are now comparing lost future bliss as the price for today’s evil pleasures instead of future agony as the price. Also, since Judgment Day is after the Millenium, we discount for at least a thousand years. 1/1.1¹⁰⁰⁰ = 4*10^-42. Multiply this by eleven and the present value of future eternal bliss is still utterly insignificant! Beware of Biblical scholars with MBAs!

And this is why the financially educated need to be subjected to regulatory hell now, with the threat of greater near term hell should they act up. And we cannot afford the rule of law and innocent until proven guilty for such dangerous characters. They’ll just apply quantitative analysis to the probability of a guilty verdict and act accordingly. Sarbanes Oxley was way too lax.

The above essay is satire. I am in no position to judge the motives of MBAs or our previous president. And I do not support Sarbanes Oxley or scrapping innocent until proven guilty! In large part this is a spoof of conspiracy theorists and yellow journalists who ascribe malevolent intent where the true reasons are ignorance and/or recklessness. But yes, this is also a friendly jab at business major types as well. Business concepts such as present value are powerful tools, useful when the underlying premises behind them hold. Applied robotically, they lead to silly and even downright dangerous conclusions. Case in point: the analysis above. Do not use the above analysis for your afterlife planning! There are several incorrect assumptions implicit in using present value to discount eternal consequences. I invite the business majors and economists in the audience to figure out what those incorrect implicit assumptions are and add them to the comments.

Caritas in Veritas

Yesterday, I took a look at Pope Benedict XVI's recent Encyclical on Charity in Truth. It is definitely his Magnum Opus and should lay to rest the question of which Joseph Ratzinger became Pope (the choices being the young firebrand of Vatican II or Pope John Paul II's Rotweiler).

I highly recommend it, as the Pope both writes well and has a good translator. Given that he stresses the Gospel of Life as part his economic message, you probably can't call him a Democrat - at least not in the U.S. style. Given that he espouses the justice of government action to redistribute wealth, desires that the UN be reformed to have teeth and is a strong supporter of organized labor - you certainly cannot call him a Republican or a Libertarian. He could probably be best pegged to the Christian Democratic Party label - they are conservative on life issues but liberal on economics. In the United States, we have no party that approximates what is in the encyclical, unless you consider the party Carl Milsted is proposing for the "Upper Left." Given Benedict's shout out to a green environmental agenda in his encyclical, this might be a good fit. I think we can safely call him a Free Liberal - as he does not directly condemn (or even mention) Capitalism - rather he says it can't be left purely to its own devices.

If Catholics actually read the encyclical or find out what is in it, i would think it would be hard to remain either a Republican or a Libertarian after reading it. I don't think the Obama Catholics will have any problem with it at all - in fact it comes close to justifying their position that the best way to end abortion is to attack poverty. Without the midwestern Catholic contingent, I am not sure the Republican Party can survive. The only question is, has the brand been so horribly damaged so that Free Liberals looking for a home won't bother taking it over.

The meeting with Obama and the Pope on Friday should prove interesting in light of the encyclical. Whoda thought that the Vatican Rotweiler and the Illinois Senator with the funny name might become buds. Given the encyclical, I frankly can't see why not. Maybe the Democrats will become the Free Liberal Party. If the GOP goes away and the Dems become too big, the natural result is schism - maybe one of the pieces will finally give Catholics and Free Liberals the political home they desire. More will be revealed.

High Speed Rail: Railroading Taxpayers

The Rio Grande Foundation has introduced a new study from prominent transportation expert Randal O'Toole who has analyzed the limited positive impact high speed rail will have on Americans and New Mexicans in particular in terms of mobility and the tremendous impact such "investments" will have on taxpayers. Read more in the study release here.

The full study is available here.

Chrysler Travesty

In what may be the end of the rule of law, the Supreme Court decided to NOT review the terms of the pre-packaged Chrysler asset sale. In the name of expediency, bondholders have clearly been short-changed in this process, and, near as I can tell, no one disagrees. And yet this contractual arrangement -- being inconvenient -- is just swept aside.

Not good. Not good at all.

If secured creditors can just be blithely ignored, this will have ramifications, potentially huge ones. Why would anyone buy debt -- especially of a "too big to fail" enterprise -- with this precedent hanging out there?

With the multiple crises happening simultaneously, and this one being rather obscure, few have taken notice. Be sure that debtholders of OTHER companies have.

-RC

Tullock Tower at George Mason University

Help us rename the Truland Building after Professor-emeritus Gordon Tullock!

Naming “Tullock Tower”

George Mason University now completely occupies the Truland Building (the black “Death Star”/”Borg cube” behind the School of Law in Arlington). The university is trying to figure out what to name the building, and several individuals have suggested naming it for Gordon Tullock, the legendary GMU professor of law and economics, and a founder of the public choice school of economics. If you don’t already know Tullock and his work, you can read more about him at GordonTullock.com and at Wikipedia.

Why we need “Tullock Tower”

• Show admiration and gratitude for Tullock’s trailblazing work
• Give attention to public choice economics generally
• Spotlight the excellent Mason law school and economics department
• Promote George Mason’s branding as a center of innovation and creativity

Whenever someone drives past and sees the “Tullock Tower” sign at Washington Blvd and Kirkland, or has a class in Tullock Tower, the name will invite them to consider why it was so named and to learn about a great thinker. For those who already know him, and are working to further Tullock’s insights and to emulate his entrepreneurship, we will be reminded that our work is making a difference in the world and that it is worth continuing.

What you can do to help

1. Sign your name in the comment field below, with your affiliation. Your public support of this effort is crucial to letting GMU know how much support there is for naming the building after Gordon Tullock. GMU students and alumni probably have the most influence. But, faculty, donors, and members of the community can also have a impact on this decision.

2. Write an email directly to Larry Czarda, GMU VP for Administration at lczarda@gmu.edu expressing your support for Tullock Tower. If you can add a personal remembrance or a particular Tullock idea that has moved you, please include it to make your message weightier.

3. Post a link to this blog entry on your Facebook profile. Tweet your support. Email your friends. Blog it. Digg it.

Please act quickly, because time is of the essence...

/KDR

***06/15/09***

Comments below are closed, please show your support here.

Why Socialism Doesn't Work (a case study)

The United States Postal Service is a truly socialist enterprise. Anyone who has to deal with the Post Office on a regular basis, especially if you have to go to the actual offices themselves, is aware of this. Of course, as has been well-publicized in recent months, the Post Office now faces massive financial problems.

Of course, in a socialist agency such as the Post Office, politics plays an incredibly large role. As this article from today's New York Times illustrates, when it comes to cost savings, politics makes increased efficiency very difficult to achieve. With USPS facing a $6.5 billion deficit, "the agency continues to spend $46,000 a year for a challenging small-plane route that serves about 20 addresses secluded in the roadless wilderness of the northern Rocky Mountains."

Inevitably, the story goes on "John E. Potter, the postmaster general, began getting calls, letters and e-mail messages from the owners of ranches on the river. People showed up on Capitol Hill in rafting sandals and cowboy boots.

Then, just before Mr. Potter was about to face a conference call with the four members of Idaho’s Congressional delegation, he decided that the high-flying weekly route through the Frank Church-River of No Return Wilderness, in place for more than half a century and the last air route into a wilderness area in the continental United States, should best be left as is."

So, 20 or so people receiving a massive government subsidy succeeded in killing a reform that would have saved this so-called business money in it's ongoing effort to break even. A private company, on the other hand, could easily make the decision to not serve such high-cost customers. Unfortunately, America is moving rapidly towards greater politicization of health care, energy policy, and manufacturing to name just a few areas of the economy that will become much less efficient under government control.

Soak the Rich and Lose the Rich

The Wall Street Journal had an excellent article about the negative impact of high marginal tax rates yesterday. The article discussed misguided efforts by politicians in California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon to increase income tax rates on the highest earners within their respective borders. While politicians facing massive, spending-induced budget deficits are certainly eager to get their mitts on "excess" earnings of the "rich," the track record of these politicians in doing so without destroying wealth is rather spotty.

As the authors point out:

From 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. Over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

So, the truth is that the taxing and spending policies of America's most poorly run and rapacious states are simply pushing productive activity to more fiscally-responsible states like Texas. In fact, the authors point out, "Texas created more new jobs in 2008 than all other 49 states combined."

An Economics Lesson for Obama Lovers

OK, enough riling libertarians for the moment; it’s time to rile up some liberals. (Hey, this is the Free Liberal.) That is, it’s time to teach some big-government liberals an economics lesson, one which makes spending federal money like a kid in a candy store a bit less pleasant.

Deficit spending is regressive. Deficit spending subsidizes those who have money to invest in the same way the USDA subsidizes dairy farmers when it buys up cheese to rot in warehouses. This means the much-beloved Obama is budgeting more money to subsidize the rich than Bush did!

Elsewhere, I posted a satirical piece describing the budget announcement as if the administration was honest and aware of what it was doing. Here’s an excerpt:

When questioned by an astounded press corps, Obama improvised, “After eight years of horrible ineptitude by the Bush Administration, I wondered why we still have so many Republicans remaining in the Senate. Why didn’t Al Franken win in a landslide? How could a Republican even come close – in Minnesota??

“Then I raised up my eyes and gazed heroically across our once-misgoverned land, searching for those who did not yet accept my message of ‘Change.’ And I beheld Billionaires for Bush marching the streets. My advisors told me it was impossible for us to convert America’s billionaires to the Democratic Party. I rebuked them, shouting, ‘YES, WE CAN!’

Read the rest here. Enjoy.

Obama Man Can

This video is quite funny:

It reminds me of the great Simpson's number "The Garbage Man Can.":

Hopefully Americans wake up and realize that government simply can't and shouldn't do everything for us.

Obama's Town Hall on Credit Card Debt

President Obama was in New Mexico today for a town hall meeting. Even though I couldn't get on to the campus of Rio Rancho High to interview people about Obama's talk (video of the town hall can be accessed here), I did have an opportunity later on in the day to lead a panel discussion on Obama's talk, specifically relating to his proposals for imposing federal regulations on the credit card industry. You can listen to the audio along with the rest of our "Speaking Freely" shows here.

Not surprisingly, many consumers would like to pay lower interest rates on credit card debt, but such regulations could also wind up making it more difficult for responsible consumers to obtain such cards. Besides, if you don't want a credit card, you don't have to get one.

Decisions, decisions...

On the back of today's Politico newspaper there is an advertisement sponsored by the National Automobile Dealers Association. In a statement addressed to President Barack Obama, the association asks the president to not cut the number of dealerships -- a move that the association feels is what the financial markets desire, "Mr. President, we urge you to choose Main Street over Wall Street."

As the result of the bailouts of the auto companies, we now have the president as CEO for America's distressed companies. Those who have not read Gordon Tullock's Bureaucracy, would be well advised to pick up a copy. Tullock explains how in any hierarchal organization, the larger it is, the less competent the management is to operate the enterprise efficiently (internally and with regard to other market actors).

Barack Obama is a very intelligent man. But, even a man of his intelligence cannot possibly understand the "model" of the federal government in all its particular operations, its ultimate effects, and the feedback that it gets from other social systems. The most expert bureaucrat could not hope to master such a beast. We might say that such knowledge is unobtainable. Now, Obama is also supposed to run companies that must compete in the marketplace. Yet, Mr. Obama has never been the CEO of a large corporation.

The first rule of Jeremytarianism is "You will fail." The administration moves itself closer to this truism with each expansion of its responsibility set.

/KDR

Car Dealerships and Hedge Funds

Mack McClarty writes about the risk of bankruptcy by GM and Chrylser to the car dealerships in today's Washington Post.

Sorry Mack, but perhaps the time for dealerships has passed. The franchise system was, in part, a way to shift product risk from the manufacturers to small business and part to prevent their sales and maintenance forces from unionizing. Neither strategy seems to be good at this juncture.

Perhaps it would be better for the dealers to sell out to the manufacturers, trading inventory and assets for stock and allowing the employees to join the UAW. In Chrysler, this would make them owners as well. It is telling that these workers were not mentioned in your piece at all.

The AP is reporting the the President will announce at noon that Chrysler is going into a short period of bankruptcy, which will allow them to deal with much of the outstanding debt held by Hedge Fund operators who refused to accept the deal proferred by Chrysler and the Administration.

Do they think that they are going to get a better deal from the bankruptcy judge? It does not seem likely. Do they seriously think that the Obama Administration is going to bail them out when they have to write these assets off when they did not play ball on Chrylser? I think not. Luckily, none of my assets have any holdings in these funds, because they are about to go south. They fought off any type of regulation in the 1990s and that decision is about to bite them hard. My advice to hedge fund managers is to leave the Lamborghini at home when going to court, because the judge may seize it as an asset for your investors. Given that the Administration is working to go after tax, and presumably asset, havens in the Caymens, et al, it doesn't take a fortune teller to see that the end is near.

The Chrysler Deal

Chrysler is about to be reorganized, going from an essentially privately owned firm to a firm owned by a combination of private firms, its employees and the federal government, with the UAW controling 55% of the pie. The actual compensation of the ownership has not yet been released and will be interesting. The last obstacle to the deal seems to be a ratification vote and an agreement by all bondholders to take less than face value (as compared to the zero they would get if the company failed).

This was actually the easy part. The hard part is how this new firm will getting people to buy cars again and as importantly how the firm will be managed. The new firm will learn about quality and participative management from Fiat, which is a good sign from my anarcho-synidicalist viewpoint, since European participative management will impact the day to day functioning of Chrysler in a way that will reduce both cost and increase human dignity. The impact of that may well be less of a need for governmental regulation. The anarcho part of me likes that a lot.

The acid test will be how profit, wages and positions are divied up. If Chrysler is run the way United is run, the experiment will be a flop. If it is run along different social assumptions, however, it may well make it, although it is a hard row to hoe. it is not easy to move from a top-down hierarchy locked in a death match with a top-down union to a more economic and egalitarian model. I have a few ideas along this line. Anyone in either management or the Union who is interested in these is free to contact me. They are laid out on my Iowa Center for Fiscal Equity web page at www.geocities.com/iowaequity/governance.html and the companion piece at www.geocities.com/iowaequity/payequity.html.

Business Cycle Theory?

Right now, I'm trying to further develop my understanding and ability to explain of the business cycle theory that makes the most sense to me, and I'd like some comments as to both the basic presentation and the underlying theory. I was trying to explain Geoist business cycle theory (the land cycle) to a friend last night, and I found myself unable to express myself clearly. This is something I started writing up this morning:

1. Economic progress occurs: quantity and power of labor and capital increase, while land remains the same. Aggregate land demand shifts to the right, while aggregate land supply remains static. Result: increase of land price.

2. Speculators are looking for a place to store value. Land, being a thing that apparently automatically increases in value over time, is an attractive "investment." Speculative demand shifts demand further to the right. Land prices rise more.

3. Artificially high land values mislead landholding consumers into thinking they have more wealth than they actually do, spurring additional consumer spending (the wealth effect). This results in a temporary increase in the standard of living, as consumers unknowingly consume their savings (therefore stimulating an unknowing consumption of the capital structure by businessmen aiming to meet this increased consumer demand).

4. Speculative demand increases yet more in response to the price increases that occur in step two... raising the price again. However, prices have now risen above a rate many actual potential producers can afford. At market equilibrium, some businesses fail, others take their place, but at this stage, businesses fail without being replaced: high land prices block out potential replacements. Additionally, some necessary services are neglected in favor of consumer goods due to step 3. Production falls.

4. The most recent speculative buyers begin to have a hard time selling at a price that justifies the original purchase, due to a fall in productivity. Prices remain steady as landholders attempt to ride out the slump, but because the slump is caused by the high prices, it cannot end until prices collapse back to a level that can be sustained by producer demand. Thus, demand shifts back to the left with speculative demand shifting out of the land market.

5. Prices being with reach of producers, the economy begins to grow again.

Let's Have a Tea Party!

Awhile back I blogged about CNBC's Rick Santelli and his articulate rant against some of the federal government's poorly-designed and unfair policies. During his tirade, Santelli talked about holding a "Chicago Tea Party" to protest these policies which are killing our economy and foisting massive debt on our children and grandchildren.

Well, Santelli has started something. In fact, there is now an Albuquerque Tea Party. Cincinnati recently held a tea party that drew 5,000 people. The trend seems to be spreading nationwide.

Revisionist Monetary History, or the Truth?

When I saw Alan Greenspan writing The Fed Didn't Cause the Housing Bubble in the WSJ this morning, my gut said, "Ah, oh, here's comes an ex post rationalization."

Since I once had a lot of respect for Greenspan, and then assumed his Fed's easy money policies "caused" -- in part -- the housing bubble, it was easy for my bias to be that he was trying to protect his reputation, which was once sterling but is now not.

He points out the Fed started to tighten money (more properly the Fed Funds rate) in 04, yet mortgage rates remained low. But the rates decoupled is his statistical evidence.

This is all above my pay grade, but that's an interesting data point. Post 9/11, the Fed did ease...a lot. I recall being impressed how quickly economic activity perked up in 02, and easy money seemed to be a BIG reason for that. Maybe decoupling happened, maybe for reasons we still can't quite fathom. Maybe Greenspan is cherry picking the data to make himself look good, or at least not as bad.

One guy is not our savior. Nor is one guy the Antichrist. It takes lots and lots of angels or lots and lots of enablers to make a trend. Isolating sinners and saints is not a business we should be in...too much information to assess.

-RC

Marginal Confusion

One theme that poisons the public debate is that there have been "tax cuts." In common language that seems to mean to in Year 2 after a tax cut, the absolute dollars of taxes paid goes down. Generally, what are called "tax cuts" are actually "marginal rate reductions," which is a different animal.

Looked at in fifths of the populations (deciles in wonk speak), the top fifth (the "rich") generally paid more taxes after a marginal-rate reduction. The supply siders are right about that.

But, ok, we have a progressive in the White House, one who seems to believe that the "wealth gap" is unfair. I'm not troubled by the wealth gap per se, but I am as or more concerned about the "bottom" four-fifths than Obama is. So I guess I take some solace that they only plan to increase taxes on the "wealthy." Better than raising them on everyone!

Still, if I was forced to offer an alternative that raised total revenues, there are less destructive ways to do it. For example, they could cap tax preferences at a dollar amount, or as a percentage of gross income.

Low marginal tax rates help everyone, for it doesn't penalize risk taking as much as high marginal tax rates. Capping tax preferences would penalize tax-motivated behavior. I of course wish that everyone could keep as much as possible of what they earn...we're in triage mode here, people. But there does seem to still be far too much economic behavior that is motivated by artificial tax shelters, at any given level of total tax receipts.

A tax-preference cap also sidesteps the innumerable special interests whose purpose in life is to protect their constituency's tax preference. With none singled out, the "costs" are diffused among all these powerful constituencies.

Bush is such an easy target these days, including his marginal-tax-rate reductions. But Obama's call to allow the rate reductions to sunset is a classic example of cutting off one's nose to spite one's face.

And, yes, taxes are overall way too high. And, yes, there are probably better (less bad) tax schemes (flat, fair, one-rate, etc.) I'm sure I would not want to overhaul the entire tax system in this environment, as I'm as certain as I can be that Obama and the Ds would create a nightmare that would take a decade to recover from.

-RC

Americans are Angry (finally)!

There is an anger building in America. Having been hoodwinked by the supposedly "free market" Bush Administration, the transparent socialism of the Obama Administration is causing average Americans and even the media to take notice. If you haven't already seen it, check out the following spot-on Rant from Rick Santelli on CNBC:

Lest you think Santelli is just another ranting, talking head on television, check out his insightful interview on National Review Online.

Lastly, a friend of mine, local Albuquerque businessman Wayne Unze, had an excellent letter to the Albuquerque Business Journal. The letter is pasted below:

In case you're not already painfully aware, since the election stocks have plummeted approximately 2,000 points. This demonstrates a tremendous amount of investor displeasure, or at best, uncertainty, with regards to the newly elected administration. And with so many of the newly appointed Cabinet members either coming under fire and/or resigning for various inappropriate activities or resigning due to an inability to reconcile the new Economic Stimulus Package, investor confidence appears to be non-existent.

It will be interesting (and possibly very frightening) to see what the future holds for those of us who have worked so hard only to see our retirements usurped by a government more focused on earmarks and entitlements than restoring the free enterprise capitalistic system that made America great for so many years. Most Americans seems to have forgotten a very important principle: whenever you accept a "handout" from another individual or entity (especially the government), you relinquish some degree of personal freedom.

"Getting the housing market moving again"

This morning I was watching "Forbes on Fox". Even though the panel was largely "capitalist" (in the limited, crippled sense implicit to the talking heads on shows like this), people like these, for example Steve Asman who is not a bad or terrible guy, simply appear to have no real understanding of how markets actually work.

Asman said that, "We just have to get the housing market moving again." But we don't. Not at all. We just have to let prices fall to their equilibrium values. That's it. When they have, houses will be selling, and markets will be clearing, by definition.

The same is true with all resources that are idled by the correction. Assets were misallocated in the bubble. People have to sort out what the best application of those assets is, and this is not an instantaneous process. This information has to be discovered. Holding an asset idle is a speculative, entrepreneurial action, because you believe, or maybe hope, that you can get a better price for that asset in the future. But that hope is constrained by savings, and when those savings are exhausted, if not before, that asset will be put on the market at a price that will clear, even if this cannot be done in a way that maintains the solvency of the current owner.

Trying to "get markets moving again" by crazy, ad hoc government interventions and policy schemes only increases uncertainty and make it harder, if not impossible for owners to figure out where to most profitably move idle resources. It creates economic paralysis, and increases the chances that resources will once again be misallocated.

Third and Fourth Thoughts on Supporting LVT

I am posting here because the comments section on Dr. Fred's last LVT article is closed. I responded to his last article and he responded to me. He made some good points (which I wish he would have made in the original post).

One of the comments states that, when a mortgage is already in force, the bank would pay the LVT. This works for me, although it might not work for the banks if the LVT they are responsible for is more expensive than the mortgage. If the medium income worker pay in the 20's for all taxes, including Social Security, and only pays in the 10's for insurance, the numbers still don't add up. The bigger the property, the more likely the landholder has a really high income tax bill which must be replaced by the LVT - which will result in banks subsiizing tax payments for its mortgage holders. On Fourth Thought, this proposal still needs work.

Fred asks why a "dead weight" tax, like a business income tax which is mostly redirected to workers and retirees, is superior to a non-dead weight tax, like an LVT? My answer is that using the LVT as a single tax will move many people toward renting in order to avoid taxes - which preverts rental costs and pushes poor renters into the street. The tax elasticity of an LVT is not 0, so an LVT cannot be said to be a non-dead weight tax.

An income tax, and even a heavily credited business income tax (or VAT or Fair Tax) can function as a negative income tax and actually increase spending in the economy. It is also much more nimble in taxing the "right people" where an LVT is a much more blunt instrument in that it is much more likely to mess with middle income land owners in a negative way, especially those landowners who have more kids and therefore pay no income taxes, but would pay an LVT or be forced into rental (at a higher rate, as rents will include a "tax avoidance" premium).

I am not against having some kind of LVT. Using it as a single tax, however, is not feasible.

Family Income

Dalton Conley of NYU writes in Sunday's Washington Post about family income inequality. In reaction to the Lilly Ledbetter Act, he notes how women working, professionals marrying professionals and the lack of a "family wage" have put some families at the top of the economic ladder while others struggle for decent shelter. He argues that we must do something. He is correct - although not specific.

As I have said in this space previously, as long as professional women expect their professional husbands to keep working, they are at a disadvantage - as men have testosterone which causes them to strive to be top dog at work. If women want those jobs, they need to allow their husbands to become full time child rearers and happily pay greens fees when the kids are in school. With less male competition, women are more likely to get that promotion.

The idea of a family wage needs to come back - and it needs to extend to everyone, regardless of their "base wage" or productivity - which means it must be subsidized by the tax code. The responsibility of filing most taxes should rest with the employer (who actually writes the check anyway - they pay taxes and workers get a rebate each year). Corporate Income Tax can be expanded to Business Income Taxes - covering all forms of ownership. Wages can also be made taxable for the Business Income Tax, with a much higher floor for personal income taxes, which should in essence become a high income surtax of 3% (for the current 28% bracket) to 15% (for the restored 39.6% bracket). All the usual credits (child care, EITC, college savings, Child Tax Credit, the mortgage deduction, health care and insurance) would be against the BIT and be paid either to the employee or to the employer if they are providing the relevant service (like comprehensive health insurance or a no-interest mortgage). Non-retirement payroll taxes would also be merged into the B.I.T., with optional credits for offering superior retiree health coverage, severance and disability rather than having the government do it.

This tool could greatly increase equality, given the political will to raise the dependent credit to living wage levels (like $500 per month per dependent - including dependent spouses). It would in essence be a hidden Value Added Tax and may be used with a visible VAT to give the illusion that everyone shares in the duty to pay taxes. With a VAT, the BIT could be set to a rate where it mostly distributes tax and social insurance benefits, although some firms with fewer dependents or retirees may pay some net tax, while others would keep a portion of the VAT proceeds if they have more social obligations.

Defending the First Time Homebuyer Tax Credit

Fred Foldvary recently criticized the first time homebuyer tax credit as an example of superficial thinking . He states that since the government is going to have to borrow money to finance the credit, this is a zero sum game. Furthermore, real estate prices need to fall to normal ratios of prices to rentals, so we need to let prices fall.

I beg to differ. While both of his arguments are true in general, both need to be qualified…significantly.

Federal deficit spending squeezes the credit market. No argument here. I have long maintained that deficit spending subsidizes those with money to invest at the expense of those who need to borrow. But in this special case, federal borrowing is not the bottleneck to credit. Banks are loath to lend not because of lack of savings, but because their balance sheets are hurt by depreciated loan portfolios and underlying collateral. Case in point: mortgage interest rates are way down.

Home prices were too high—once again, no argument here. In fact I was in the market a year and a half ago but quit due to sticker shock. But at least in some markets prices are already down enough, and are threatening to go lower.

For housing, the simple Adam Smith price model is wrong. Supply and demand curves don’t give us the current price. Homes take time to build. Homes are almost always purchased with credit; the home market is highly leveraged. When housing is scarce, prices can skyrocket as people use credit to bid up what is available. Eventually, homes get built, pulling prices down, leaving many early buyers owing more than their homes are worth. Some go bankrupt pulling prices down further, which make ever more homeowners underwater on their payments.

A highly leveraged market is an underdamped filter. Think of a 1970s vintage American land yacht with worn shock absorbers. Such a car smoothes out bumps initially but bounces afterwards. Leverage allows faster home building when demand is high, but creates the potential for a bigger housing bust after the homes are built. In other words, if the government does nothing about the housing bust, prices will go well below equilibrium.

The results of going below equilibrium are not pretty. When prices drop too much, homeowners who need to sell but cannot go bankrupt. When banks get a low price on foreclosures, banks cannot afford to lend – which drives home prices down further yet. Positive feedback abounds.

It’s all well and good to neener dance and say we shouldn’t have had such a leveraged housing market in the first place, but that doesn’t solve today’s problem. Today’s problem will result in government action one way or another. Either the government damps the oscillations caused by over-leverage, or the government will control huge amounts of assets via the bankruptcy courts. Government action is a sunk cost. The only question is which government action is less bad.

True, propping prices up too much is a very bad option. Prices need to drop enough so owning is competitive with renting.

Also true: bailing out those who lied to get loans is suboptimal; it rewards bad behavior, creating a moral hazard. Indeed, any action to prop up home prices punishes those who prudently did not buy when prices were too high.

The first time homebuyer tax credit strikes a nice balance. It helps keep prices from falling too low while compensating the prudent for the lost fire sale opportunity. And as I’ll show in a future article, a first time homebuyer tax credit has many other nice features. It is a far better way to encourage home ownership than the long running mortgage deduction. Indeed, I would go so far to recommend we make the credit permanent while eliminating the mortgage deduction.

Another: Is it just me...

...or is this idea a really, really bad one?

Yes, Arianna Huffington -- and many progressives -- are calling the Big Bad Bailouts, a.k.a., the fiscal stimulus and financial rescue plans, "economic shock and awe." Reminder: Shock and Awe was the strategy for the Iraq War.

The irony drips. Most progressives OPPOSED the Iraq War and shock and awe. Yet they want to apply war strategy to the economy.

My goodness, where to begin. The "economy" is not some abstraction, some "thing" that requires chemotherapy.

The economy is us, all of us. How it aggregates gives us a sense of its relative health over time. Right now, we're in aggregate not doing so well. But to compound the problem with a shock to the system with warlike methods seems profoundly contra-indicated.

This is what Herbert Hoover and FDR did, and that didn't work out so well.

But it appears that's the path we're on, as Obama will sign the shock-and-awe stimulus package on Tuesday.

Keep your heads low.

-RC

Disproving the Opposite

OK, so the Ds appear to have rammed through the stimulus bill. Now what?

I'm so torn. If we are living in "normal" times, the economy will recover. That's what economy's do. That's what happens in life generally. Sometimes you're up, sometimes you're down.

So, let's say the recession ends in June 2009. The Ds will claim the stimulus did the trick. It's a brilliant masterstroke of economic stewardship.

At some point, if the economy doesn't recover, the Rs will blame it on the stimulus. Or the next crisis – say, inflation – will be blamed on the stimulus.

That's the thing: Neither can really prove or disprove the opposite. There is no macroeconomic laboratory. There is theory. There is history. Both help us to form opinions and positions, but neither can certify causation.

That's why we tell each other stories, to try to make sense of nonsense. If we're honest, we admit the stories might be true, but odds are very high that at best our stories only roughly approximate the truth.

Maybe the stories help us get by.

-RC

Are We Living Atlas Shrugged?

Depressing as it may seem, at least for those who are familiar with the book, as Stephen Moore of the Wall Street Journal points out in this interesting article, we seem to be living in the world of "Atlas Shrugged." After all, government is standing the way of success and subsidizing failure like never before and if Obama lives up (or down) to expectations, things will get a whole lot worse in the years ahead.

Fortunately, I think the American people are beginning to realize what is happening and what has happened under the Bush Administration, but we will be in for some tough battles ahead.

The Incredible Shrinking Taxpayer Class

Yesterday I listened Laura Ingraham and Pat Buchanan bemoan the tax cutting plans that Obama is suggesting.

Their concern was that the percentage of actual taxpayers would decline under the Obama trial balloon. I'm not sure they were accounting for ALL taxes, or just income taxes, although it sounded like the latter. They seemed to make a public choice argument, that if the percentage of non-taxpayers rose, there would be fewer to resist tax and spending increases.

That seems to be a valid point. On the other hand, most government spending is not for the less well off. And even the spending that targets the less well of was generally agitated for by the more well off. It seems to me that the less well off are too busy surviving to be agitating. The well off -- especially seniors -- have the time and resources to slam through things like prescription drug benefits for seniors. They have gobs of time and resources to concoct crazy geopolitical narratives about meeting jihadist enemies in Baghdad before they sail into the port of Baltimore.

Plus, I'm not sure that if the bottom two deciles of taxpayers get off the hook that that leads to increased government necessarily. It could embolden the next decile up to demand their taxes be reduced, too.

-RC

Bailout options

Whether the current bailout works or not, the Alt-A mortgage bubble will force the need for a new one. We need to be careful that we do not simply repeat the mistakes which set this one in motion by having too low interest rates leading to a reinflation of the housing bubble.

There are five reasonable options here. The first is liquidation - providing a means through bankruptcy or some other systematic default mechanism to allow people to get out of debt that does not work.

The second option is to end tht toxic practice of allowing people to get home equity loans to "cash out" equity for vacations and the payment of credit card balances - since this simply leads to more debting. Ending the deductibility of these interest payments would take care of this nicely, possibly as a part of comprehensive tax reform.

A third provision is to create government progams for borrowers to refinance their Alt-A morgages at lower fixed rates through their state housing finance agencies. This could be done either with or without adjustment of the principal balance. If the principal balance is adjusted, however, the government needs to reach back and capture through taxation some of the extreme capital gains people made in when the housing bubble was growing. For some, this would be a wash, since they sunk their gains into a new property which is now worth less then the purchase price - however other sellers got out and stayed out - although many of these probably lost money by investing in the toxic paper that resulted from these very transactions. If we bail them out for these investments, it must be net of their undo capital gains. This is why a government bailout is necessary, as the private sector has no place making such distinctions.

The fourth and most important piece of any bailout should be higher incomes. If incomes catch up to housing values, much of the problem goes away and housing prices can stabilize and debt will be repaid. Calls for governmental budget cuts, teacher furloughs, lower union wages need to be resisted - since they will exacerbate the problem. If anything, people should be getting raises and the minimum wage increased. For any who are displaced in the private sector, massive education funds with stipends should be made available when people are operating at a human capital deficit.

The fifth point is to increase the top tax rates, not at $250,000 but at $150,000, to at least Clintonian levels - as well as restoring the capital gains and investment rates to those levels as well. This will put more money in the consumption and government sector and take it out of the chase for overpriced investment instruments. Stock prices and real estate values were bid up because the wealthy and upper middle class had more money then the productive sector had investment opportunities - so toxic investment opportunities were created and unrealistic profit goals were required to compete. Take away the fuel for the fire and all will settle down.

Paying Land Value Taxes

Dr. Fred and I have had a running debate on the advisability of Land VAlue Taxes. In this entry, I am going to ignore the problem of lowering land values through taxation while many home owners are already underwater and go straight to the issue at hand - how are land value taxes.

The simple answer, of course, is that the land owner writes a check or has it included in the mortgage. It is more complicated than that, however. Land is not automatically productive. Its value comes from how it is used - either for resource extraction (mining and farming), as the location for commercial activity (manufacture or commerce) or for residences (either rented or owned). If residential land is owned, then rent can be imputed through residential use - the opportunity cost of renting similar property in a similar location.

In the resource and commercial arenas, the source of the money used to pay the tax is obvious - the owner may be obligated to pay, but the money comes from sales and will be accounted for as a cost of doing business. If I have 1000 acres of land, the decision to engage in operations or sell the property is partially determined by whether the gross profit from the business will cover the LVT payment. If it does not, the land will be sold or if unsaleable abandonned to either the government or the mortgage holder. This may serve to lower land prices, but I am not sure that using default as a method of price control will be seen as a good thing in the commercial sector any more than it is currently seen as a good thing in the housing sector. It is good if you are a land purchaser, but awful if you hold land and wish to sell it (or are a government wishing to tax it if the tax is based on value rather than on acerage).

For residences that are leased, whether it determines the market rent or not, the cost of the LVT will be included in the decision to operate the business, sell or default (or lobby for a lower tax rate - which is also a very likely course). If operating the business is chosen, then the funds to pay the tax come from the renters (or from the owners pocket if taking a loss is an acceptable outcome - NOT).

For owned residences, LVT is a tax on income or savings, albeit indirect, in that the residence does not produce income (unless a room is leased out - see prior paragraph). In this case, the homeowner must have a job, royalties, interest or dividend income, other rental income or savings to deplete in order to pay the tax or lose the property to the taxing authority. Note that all of these revenue streams can eventually be traced back to a commercial transaction, since people get income from sales of their own services to either an end user or by combining it with the labor of others in a company or supply chain which eventually results in a commercial sale (with the exception of public servants, who pay the LVT from salaries paid from tax revenue).

In all of these cases, the link between the LVT and the commercial transaction used to obtain the money to pay the tax is very indirect, although if the LVT is a single tax then it must initially be high enough to replace the revenue currently collected by all other taxes (income, sales, property, sin taxes, fees) and may be even higher to compensate some individuals for the inevitable economic disruptions (as land loses its value and whole industries fail). If it is phased in, the impact may not be as great. Even if the LVT is a fixed cost, the link between it and the need to make all non-public land productive still means that customers must pay, as ultimately the average person in the average home with the average number of children working for the average size business will likely have to pay the same in taxes as they currently pay - and they may have to pay more. Buried income taxes will be replaced by buried LVT taxes. If distributional equity is a goal in the LVT movement, then it seems easier to gain this equity by progressive income taxes, since the taxes collected by the very wealthy are buried in the same way regardless.

Fair Tax Compromise

In the past two elections, the Democrats have picked up 75 seats. It will take some really bad government to reverse this and movement by the Republican Party to the left on both economic and social issues. While oppossing gay marriage may appeal to the older demographic, it won't do well with younger voters, who are growing older and becoming more and more of a majority.

What does this all mean? It means compromise is necessary on the Fair Tax should the nation like Mike and elect him President. One of the reasons I voted for Huck is that a compromise between the Fair Tax and what the Democrats would propose looks remarkably like the tax plan I favor, which is similar to the Competitive Tax Plan of Michael Graetz of Yale. Michael of was George H.W. Bush's Director of Tax Policy, so he is hardly a flaming liberal.

Professor Graetz proposes a Value Added Tax combined with a Simplified Income Tax with a $50K individual/$100K family standard deduction. He would also provide the prebate for paying VAT taxes to poor families, the Child Credit and the EITC as an offset to payroll or through a Smart Card.

I suggest going beyond the Graetz prebate to a full up $500 per month per dependent child and spouse tax credit on an expanded Business Income Tax (Graetz would cut the tax rate to 15%) payable by all employers, not just corporations, with labor costs no longer deductible. I would also have this tax cover Unemployment, Survivors Insurance payable to non-retired widows, Disability Insurance and Medicare Taxes. I would also roll any Obama health insurance reform taxes into the Business Income Tax rate and allow any deductions or credits to be made against Business Income Taxes, whether insurance is paid by employers or employees. There would also be education credits for vo-tech, college and remedial adult education arranged by the employer and students or welfare recipients would have to get an employer or religious organization to sponsor them as employees and would be paid to go to school, with some part-time work requirement as well and the full range of tax benefits available to them. This would be in concert with state and local government. There would be no other public assistance.

Old Age and Senior Survivor's Insurance would be privatized, with some of the employer paid portion going to voting stock in the employer, if applicable, as well as a trust fund of similar employee-owned firms. Part of the employee contribution would also be invested in the same way, however the employer contribution would be credited equally, regardless of base wage. Additionally, the base minimum wage would be set to at least $12 per hour so that no one pays their employees solely with tax credits. Because some workers salaries will go down due to the tax credit, the income cap on Social Security contributions will be raised to capture 95% of wage income, thus raising the average. Workers under 35 would be under the new plan, while workers over 35 would stay under the old unless they and their firms opt to convert to the new plan by fully capitalizing all past and current older workers with stock as if they had been in the plan from day one. Firms and employees that take this option would no longer pay FICA retirement taxes.

This plan would reduce the need for government employees while still meeting all of the public purposes set out in current programs. The education and dependent benefit provisions would also take away most incentives to abortion. The benefits should be good enough so that young people in a family way can get married and husbands won't care whether the child who would have been aborted to cover an affair was really their's.

Wall Street's 2 Primary Perspectives on the Crash of '08

http://www.cnbc.com/id/15840232?video=956329241

Check out this video from CNBC. It's a great summary of the two principal responses to the current financial and economic challenges. Santelli represents the Chicago School, which says let the markets (the people) sort this out. Liesman is of the New York School, which says the government needs to intervene, albeit judiciously and temporarily.

Note that I went to college with Liesman...he was the Music Editor of the college mag I edited. He didn't make too much sense then, and he still doesn't, though I'm proud of him, nevertheless!

-RC

Fatal Conceit, Writ Large

This essay by Richard Haass reiterates a point that one hears a lot lately: The recession we appear to be in "Less and less are we hearing of V- or U-shaped economic recoveries. The immediate future looks like an L: sharp contraction followed by not much in the way of a quick rebound."

Our gloomy gold bug friends say even worse: We're in a Depression.

This Free Liberal wonders: How can they know this? An economy made up of 7 billion people making decisions moment by moment seems to have far too many variables to even begin to make grandiose guesses about what the future holds. Sure, this could be a Depression or a long recession.

On the other hand, I just paid $2.30 a gallon for gas. House prices are way down in some places. Credit is cheap and getting cheaper. Clever people see adversity and say: This is an opportunity.

And so it is.

I understand the desire to prognosticate. The human condition is marked by fear of the future, ever since Adam bit the apple. Having a sense of what happens next is, perhaps, comforting, but it is ultimately dysfunctional. Some preparation for likely outcomes seems sensible, but so does being attuned to new opportunities.

Hendrix told us the "manic depression is a frustrating mess." So is paranoia.

-RC

Is Cato "in the tank" for big government?

Over at Lew Rockwell's blog where fans of the Cato Institute are few and far between, there was this criticism of the Institute for "supporting" the federal government taking an ownership stake in America's banks. While I share Rockwell's concerns and oppose the bailout and any federal stake in the banks, it is a bit unfair to call Cato as a whole a supporter of the government's plan. The article in question that Rockwell criticized is available here. The specific quote is:

William Poole, former president of the Federal Reserve Bank of St. Louis, was a fierce critic of Treasury's initial plan to buy up distressed mortgage-backed securities. Such a scheme, he said, would lead banks to dump their worst assets on the taxpayers.

But Treasury's new tack may well do the trick, said Mr. Poole, now a senior fellow at the free-market-oriented Cato Institute.

What I don't think Rockwell fully understands is that think tanks don't always have a fully unified stance on particular issues. Different people at Cato think differently about the federal bank bailout. While it is certainly wise for Cato's leadership to carefully monitor what their representatives are saying, it is tough to attract intellectual talent if you force them toe the party line. I disagree with Poole, but having a certain amount of dissent even at a "libertarian" think tank is a reality I don't think Rockwell understands.

Hold onto Your Hats Part 3

With the Asian markets down ~10% today and European ones down 8-9% at the moment, today could be Black Friday. It's certainly been Black October.

My take is that the Bailout has slowed the Crash to a slow-rolling one, spread out over a matter of weeks vs. a one-day event. The market has now absorbed the financial panic more or less, and the government has basically backstopped a full-blown implosion of the credit markets. Now the market is looking at the fundamentals, and not liking what it's seeing. Recession seems likely, and so the market's need to re-rate the prospects of equities in the near term.

7000 on the Dow might be a fantastic buying opportunity.

All subject to change.

-RC

Who's Tax Plan?

We talk about the Obama tax plan - however, no matter who gets elected, Charlie Rangel's tax plan will be passed, with an assist by Max Baucus and some bipartisan input from Chuck Grassley.

Barring a miracle, this plan will require only a simple majority in each houuse, with the possibility that 60 votes will be needed in the Senate (which the Democrats may have). If there is a McCain victory, then the plan will be slightly more bipartisan - either so McCain signs it or to override his veto. Regardless, the Bush tax cuts will at least expire and will likely be gutted earlier.

Following the McCain victory riff to its logical conclusion - in 2010 if McCain is in office the Democrats will pick up enough seats in both houses to effectively neuter him (or by then, Sarah Palin).

Either way, the Democratic Chair of the Ways and Means Committee (even if it is not Rangel but his Vice Chsir) will get their way on taxes.

Keynes in 2008

WaPo last Sunday ran an Outlook column by a Keynes biographer regarding the current crisis.

Keynesianism broke down because it could not explain why, even with lingering deficits, the economy would go into recession. However, if one factors in the effects of paying interest on the national debt and lags the economic effects by one fiscal year, the effect is discernable. When Republicans are in power, their fiscal policies require running a deficit in excess of net interest in order to get growth. Democrats, because of their fiscal policies can balance the budget and get growth of about 3% on average per year.

The reason the GOP needs to run deficits is that their tax policies reward savers. The only way to move this money back into the productive sector is to borrow it from them, lest it be use for speculation. The Democrats tax the excess savings of the wealthy, so they can afford to reduce the debt without decreasing consumption in the economy.

Here is the equation. Note that you must run it by regime (JFK, Johnson-Nixon-Ford, Reagan-Bush I, Clinton, Bush II):

Growth % in FY+1 = (Deficit/Surplus + Net Interest in FY)/GDP

Try running the numbers before you say it doesn't work.

Obama Shorts

Or perhaps puts. Though I'm a Barr supporter, I recognize that the prospect of his winning is somewhere between low and nonexistent. But it's starting to look like an Obama landslide, and I guess that's my preference. The prospect of Strangelove McCain with the nuclear football at his beck and call is just too frightening for this hombre, my friends.

In this upside down world, we have (not much of) a choice between two flavors of violence. Peace in all things being my mantra, our elections always seem to offer a trajectory away from my preference. Both Obama and Strangelove want to "do," I want to "UNdo."

Still, all things considered, blessings should be counted. Obama is neither Hitler nor Stalin. Odds are low that our nation's store of wealth will be completely destroyed, plunging us all into Cambodian subsistence levels.

So, what are some opportunities that might arise from an Obama administration?

A few that come to mind are shorting or buying puts on ETFs of the healthcare, pharmaceuticals and energy sectors. Both are likely to be rationed in some form during the next four years.

Any feedback of this concept much appreciated.

-RC

Bailout Blues Part I

Question: If the government can improve the operation of the markets by a bit of cash injection when times are bad, shouldn't this work even better when markets are perfectly functioning?

A better question: Why should we even bother with markets at all if government is so good about managing investments?

If government can buy bad debt and turn it into good debt, maybe it can spin cow patties into roses. Why doesn't the government take all its funds and invest in businesses that work perfectly to erase poverty, drug addiction, and violence?

Is the Bush administration a total disgrace or the most brilliant leadership ever?

/KDR

Who is Manipulating Oil and Gas Prices Now?

It seems like only yesterday that Congress and all manner of people who are ignorant of basic economics were bashing oil and gas companies for their supposed efforts to manipulate prices and keep them high. Now, with the global economy on the skids, crude prices are plummeting right along with the stock market and are likely to keep dropping.

So, the question must be asked: where are the speculators and manipulators? If Exxon has an iron lock grip on the prices it charges for its product, why aren't they keeping them high or at least stabilizing them? The simple fact in is that they don't control prices; they are "price takers."

Hold Onto Your Hats Part 2

Early morning indicators is that the markets are trading down, big. Asia and Europe have gone or are down 5%, give or take. Futures indicate US markets will be down big, too.

Rather than admit that the Paulsen Bailout is not having its desired effect, if THIS is the new trajectory for the coming months, Chutzpah Central (aka the Washington Establishment) will likely start to tell us that the Bailout wasn't big enough!

Then again, this just might be the inevitable perturbations of the brilliant triage operation. Not likely, but ya never know.

-RC

Reacting to the Bailout

Robert Capozzi suggests free liberals should have had a rational plan to ease out of this credit crunch. Maybe so, if we had some people in Congress and millions of dollars to promote our ideas. Given the speed of the crisis, and the fact that the groundwork was lain years ago, the traditional libertarian approach of griping and neener dancing is perhaps appropriate.

To this end, I have put together a mean-spirited photo essay mocking Wall Street millionaires asking for government largesse.

Enjoy.

And then we can get back to the less fun work of coming up with constructive near term solutions in those areas where we theoretically have time to act.

Barney Frank and the Gold (I mean "Energy") Standard

Caught part of an interview by C-SPAN with Barney Frank (one of the hardest-to-listen-to voices on the Hill) in which Frank flubbed a response to a caller who suggested the dollar should be on some kind of real standard.

The caller's favorite idea seemed to be that the standard be energy ("kilowatt-hours" I believe was the term used).

Frank though the caller meant we should do away with the dollar and spend energy instead.

Has anyone considered if an "energy standard" would work, how it would work, and how it would stack up against a Pauline gold standard?

Is This Any Way to "Run" an Economy?

Who'd a thunk it? The economy is 7 billion people making decisions moment by moment, and we're all waiting with baited breath on a few old dudes and one dudette to craft a package to save us all.

The pathos is just too thick for this observer.

No one wants the blame. No one REALLY wants the responsibility. Oddly enough, none should get either.

That's precisely the problem. Mismatching roles. Reluctant usurpers. Damned if you do or don't.

Que sera.

-RC

Blame Government for Current Financial Problems

These are dark days for those who believe in free markets and limited government. Each day brings a new story of a new, major financial company in trouble and now Congress is dickering over a $700 billion taxpayer-financed bailout package. Many on the left like EJ Dionne and even the supposedly conservative presidential candidate John McCain is blaming "greed." Unfortunately, the conventional wisdom seems to be that massive government intervention is necessary because the financial markets are "broken." Of course, the implication is that we have a free market and it is capitalism, not government, that has created the problem.

The reality could not be more different. Back in 2000, my former colleague Jeff Dircksen at the National Taxpayers Union stated that:

The secret of (Fannie's and Freddie's) success --subsidies-- could also prove to be their undoing. Given their market dominance, Fannie and Freddie may need to pursue increasingly risky loans to maintain a portfolio that has grown at 18 percent per year over the past decade. An economic downturn or a change in interest rates could cause substantial numbers of higher-risk borrowers to default, sending Fannie and Freddie’s stock prices tumbling, and leaving taxpayers holding the bag.

NTU is not alone in blaming Fannie and Freddie for being at the heart of the crisis. The Wall Street Journal carried an excellent article yesterday that pinned blame on the two mortgage giants. Economic analyst Peter Ferrara has also said much the same thing.

Unfortunately, offering the correct analysis is not always enough when the media has fixated on "greed" and the misdeeds of Wall Street titans. We who understand the reality of the situation must simply keep hammering away with the truth and it will set us free.

Oh, and if you are opposed to the current plan to use 700 billion taxpayer dollars to bail out Wall Street, click here to sign this petition from the National Taxpayers Union.

Malinvestment Implications

Prof. Bill Anderson suggests here that government-induced malinvestment cannot be countered with less-unsound intervention to cushion the unwinding of the initial malinvestment.

I would like to see proof of this. It strikes me that one can agree with the diagnosis, but not the cure -- in Anderson's case, let the crash happen, then rebuild from the ashes, it appears.

I'm just not sure that a recession or a crash are inevitable. Sometimes, bridge loans work. Sometimes, growth can overcome short-term dislocations.

This is not to say that the Paulsen Plan is something to support. I don't. I'm just not convinced that shock therapy is the only righteous course here.

-RC

Economic Reality Explained

Rarely will you ever see a more fact-base and easy to understand analysis of everyday economic issues than RGF Board member and Director of Research Ken Brown's opinion piece on the pages of the Albuquerque Journal today.

Brown explains the "broken window fallacy" and why so-called "economic development" simply does not work. Copies of this piece should be mandatory reading for all elected officials in New Mexico and beyond. The Rio Grande Foundation will distribute this piece to all New Mexico legislators before the 2009 session.

Mark to Model

You'll no doubt wake to the news that Lehman Brothers -- a Wall Street powerhouse -- is declaring bankruptcy. And that Bank of America is acquiring Merrill Lynch. This is huge news. A few months ago, Bear Stearns was "rescued," so the dominos are falling more and more heavily.

No clue where this is going. Perhaps it's another example of darkness before the dawn.

But it does for me illustrate the difference between "intellect" and "wisdom." Wall Streeters invent very sophisticated investment vehicles that sound good in theory but prove unwise. This last round was all about creating synthetic securities that were derived from risky mortgage portfolios. Pooled, the risk goes down, right?

Yes, in theory. If the market in the underlying value in real estate is going up, the few bad apples can be stomached. But when the entire portfolio goes down, no one -- not Merrill, not Lehman, not Bear -- is immune.

The brilliant Wall Streeters lost all sense of balance. Rather than checking their portfolios against a real market, they relied on a practice called "marking to model." They layered on synthetic element onto another. On a chalkboard, it seemed coherent at the time.

But it's proving incoherent.

Time for some humility and authenticity. At least some!

Hey, maybe Sarah Palin's just the ticket....nah, six months in Oz by the Potomac and she'll be experted to death, intimidated by legions of experts.

Obama will lead us to the Promised Land, perhaps? The speeches will be better. But he will be handled into corruption and special-interest politics like the rest.

Back to the markets...today we'll see a big sell off...but soon the leaves will turn orange and red and a chill will be in the air. Life will go on. And so it goes.

-RC

The Difference between Love and Taxes

Jeff Jacoby tries to help Obama understand on the Boston Globe's site today:

Seeing through Obamanomics

Every time a prominent progressive like Obama displays such totalitarian thinking as to mistake taxes for charity, articles like Jacoby's need to be written.

It's the basics. But the basics are always vitally relevant.

UPDATE

For a more in-depth examination of Obama's tax plans, as well as some good background on the state of taxation in America, see "Tax Cuts, Real and Imaginary," by Gingrich and Ferrara on The Weekly Standard's site.

(h/t Barnett)

Amtrak Ridership at "Record" Levels, More Subsidies Needed

News stories this week cited the fact that Amtrak ridership has risen significantly in recent months in response to high gas prices. In a free market, a record number of riders would mean record profits (or at least increased profits), but Amtrak is America's state-owned, socialist rail system (government ownership of the means of production, in this case a railroad), so profits are not even a consideration. In fact, Illinois Senator Richard Durbin has used increased ridership to argue that more taxpayer dollars should be funneled into the rail system, in part to purchase more train cars.

As the story points out, however, rail advocates shouldn't get too excited about the railroad's so-called "success": Even though Amtrak ridership last month increased 14 percent compared to July 2007, the railroad provides less than 1 percent of all trips made nationwide, as car and air travel reign. Air and rail rely far less on subsidies on a per passenger mile basis.

This one-percent is at a relatively high cost to taxpayers of more than $1 billion per year. The Southwest Chief, which runs through New Mexico is one of Amtrak's most heavily-subsidized routes operating at a cost to taxpayers of $236 per passenger.

The Housing Bill

I have two comments on the Housing Bill.

The first is that the adjustable rate loans were, in many cases, designed to encourage flipping houses in an ever expanding market. Flipping benefits the financial sector because the new buyer pays the full range of closing costs. The end of the housing bubble stopped the expected flips, leaving mortgage holders planning to flip in a few years holding the bag.

The second comment is that the unstated effect of this bill is to bouy the financial sector by allowing at risk borrowers to make new loans to replace the bad ones, while the stabilization of the housing market will allow people to sell who need to. Both instances will result in yet more fees to keep the mortgage industry well financed by still more fees.

The Future of Tax Reform

Recently, while surfing the net in search of a real job having to do with tax reform from a Value Added Tax (VAT) perspective, I found both comments attacking the use of a VAT, as well as a copy of the VAT analysis from the final report of the President's Advisory Panel on Tax Reform. (Frequent readers know that I contributed analysis to this effort, which is provided on my Geocities page.

Overall, I am encouraged by the Panel’s treatment of this topic. (although they did not agree to make an official recommendation on it). Their overall approach is similar to mine – combining a VAT and a simplified income tax. Due to the scope of their assignment, they were not allowed to consider the replacement of Payroll Tax revenue with the VAT, even though this would be the most natural use of such a tax. Payroll taxes function essentially as a hidden VAT as they add to the cost of labor at a fairly uniform rate, with the exception that the contribution to disability, retirement and survivors insurance is capped. Additionally, in order to keep rates on both taxes low, the Panel “split the difference” by assuming a 15% VAT and a 15% high income tax rate (with a lower 5% rate for lower incomes). Work and family size credits were also assigned to the simplified income tax. This results in a system with three tax systems – consumption, payroll and income. In the end, this proposal was not adopted because fiscal conservatives on the panel believed that the VAT would make it to easy to raise revenue.

This echoes the comments of the Hoover Institute, Citizens for Tax Reform and the Heritage Foundation. These denizens of the right favor a flat tax or the Fair Tax, largely because they wish to have every citizen pay taxes in as obvious method as possible (including by eliminating withholding and requiring the submission of a monthly tax payment by every citizen), believing that this will lead taxpayers to demand less government services. They also fear that an income tax will still be included in any VAT scheme (Grover Norquist considers this the worst possible scenario), which exactly what the Panel’s analysis showed. I proposed such a scheme as well, as has prominent Yale Law Professor and former George H.W. Bush official Michael J. Graetz , although I would institute a higher VAT and lower residual income tax rate.

What I am proposing would not be as horrible as Grover Norquist and company make it out to be. I would divide the VAT into a transparent tax to fund government services and a hidden component to directly fund transfers to larger or poorer families, remedial education services to adults, disability and health care costs (employee and retiree) and education funding contributions to parents, public schools or private schools. The hidden VAT costs could be directed to non-governmental providers or to governmental providers, at the choice of the firm’s employees and shareholders. The hidden portion of the tax would be administered by the states and federal – and possibly matching local – funding of these spending priorities would be supplanted by the new tax structure. The remaining federal income tax would be enacted at a lower rate and would be set aside to pay for net interest on the debt, foreign aid and debt forgiveness, overseas military operations – including the wars in Iraq and Afghanistan, transfer costs in privatizing retirement insurance and repayment of the Social Security Trust Fund, repayment of the debt held by the public and the transition to hard currency from the Federal Reserve System. When international commitments can be fully funded by customs duties and tariffs and all real and contingent obligations are exhausted, the income tax would sunset until needed to fund armed conflict.

So, what are your thoughts on the direction and possible inevitability of tax reform in the next administration - which must either allow the Bush tax cuts to expire or do something else?

What Does Barack Obama Know?

From Bloomberg:

He also singled out Exxon Mobil Corp., the world's biggest oil refiner. Obama said he would seek to tax oil companies such as Irving, Texas-based Exxon on their record profits.

``We'll use the money to help families pay for their skyrocketing energy costs and other bills,'' Obama said today. Obama says that McCain's tax proposals would result in almost $2 trillion in breaks for companies, including $1.2 billion for Exxon alone.

But, can Mr. Obama tell us the difference between net profits and percentage profits(also known as Return on Investment)?

Do taxes reduce or increase the price of gasoline? Now and in the future? Will the windfall tax be equivalent to the free money giveaway? Or will there be wastage?

/KDR

The Swimming Brits

The British government is in a tizzy about funding free swimming pools. The Guardian has the story here

The story is remarkable for several reasons.

1. There is no rationale for government to subsidize any of this nonsense.
2. No one quoted questions why government is even involved.
3. There are several references to London's "legacy", as if taxing people to provide free services to others is somehow extraordinary.

/KDR

Enivornmentalism Turns Against Itself *UPDATED*

After Dr. Foldvary's article (Ethanol subsidies starve poor kids) and seeing a report on Comcast News about the rising cost of "organic" and "environmentally friendly" food -- and headlines like "Era of cheap food ends as prices surge" (h/t Drudge) -- I'm beginning to wonder whether the environmentalist movement doesn't need to be a lot more centralized and coordinated.

If environmentalist causes drive up the cost of food, and that keeps people from buying "environmentally friendly" foods, then . . . . What was that about "a house divided against itself"?

Speaking of the unexpected results of environmentalism, did you see this from NPR last Fall?:

Rice fields are a major source of methane — one of the so-called greenhouse gases linked to global warming. But switching to other crops is unthinkable in Asia, where rice is the primary source of calories for many people. So scientists in Thailand are trying to find rice cultivation techniques that produce less methane.

And speaking of government subsidies (in the name of environmentalism) getting in the way of "environmentally friendly" causes, see Peter Robinson's interview with T.J. Rodgers (in five parts: One, Two, Three, Four, Five).

The centralized power of the US government evidently isn't enough to coordinate the environmentalist movement. And it would be no use appealing th the UN.

(But why use a government body at all?)

-MT

UPDATE:
Looks like it's a busy week on the ethanol/food/environmentalism front. See the following four pieces on NRO today:

Hungry Like the Ethanol Wolf [Editorial]
A New Environmentalism -Victor Davis Hanson
Global Food Riots -Deroy Murdock
Saving the world is cheaper than free -David Freddoso

And see the following recent headlines on Drudge:
Americans hoard food as industry seeks regs -Patrice Hill, Washington Times
Load Up the Pantry -Brett Arends, Wall Street Journal
Two major US retailers ration rice amid global food crisis -AFP
Run on rice makes its way to U.S. -Jerry Hirsch and Tiffany Hsu, Los Angeles Times

Milton Friedman: Singlehandedly responsible for libertarianism

Or so Peter Goodman's NYTimes article ("Reconsidering Milton Friedman") might lead you to believe.

Furthermore, it seems that the experts cited in Goodman's article believe libertarianism has been refuted by the current financial crisis. That despite Jason Lewis's convincing (to me, at least) argument this past Thursday that government involvement was a cause of said crisis (or would at least make it worse, in the long run).

But what do I know? I'm neither an historian nor an economist.

Wal Mart Katrina Response Illustrates Government's Failure

"A lot of you are going to have to make decisions above your level," was Scott's message to his people. "Make the best decision that you can with the information that's available to you at the time, and above all, do the right thing." This quote from Lee Scott, the chief executive officer of Wal-Mart, was made to his employees shortly before Hurricane Katrina made landfall illustrates the mind set the company took prior to the greatest natural disaster in American history which allowed the company to succeed where the Federal Emergency Management Agency failed.

According to a new study by Steven Horwitz, an Austrian-school economist at St. Lawrence University in New York, the entrepreneurial mentality of Wal Mart's employees allowed them to excel while indecision paralyzed their highly-paid, "expert" colleagues in the federal government. A few of the specific acts of "heroism" or at least tremendous individual initiative on the part of certain Wal Mart employees:

In Kenner, La., an employee crashed a forklift through a warehouse door to get water for a nursing home. A Marrero, La., store served as a barracks for cops whose homes had been submerged. In Waveland, Miss., an assistant manager who could not reach her superiors had a bulldozer driven through the store to retrieve disaster necessities for community use, and broke into a locked pharmacy closet to obtain medicine for the local hospital.

Among the recommendations of Horwitz's study designed to improve the response to future natural disasters:

1. Give the private sector as much freedom as possible to provide resources for relief and recovery efforts and ensure that its role is officially recognized as part of disaster protocols.

2. Decentralize government relief to local governments and non-governmental organizations and provide that relief in the form of cash or broadly defined vouchers.

3. Move the Coast Guard and Federal Emergency Management Agency (FEMA) out of the Department of Homeland Security (DHS).

4. Reform "Good Samaritan" laws so that private-sector actors are clearly protected when they make good faith efforts to help.

Vote for Freedom

in the Economist's online debate on whether the government is responsible for the housing crises. Paul Moore, senior Lecturer at the University of Ulser, attempts to defend government intervention in the economy while John Berlau, Director of the Center for Entrepreneurship at the Competitive Enterprise Institute, defends sound economics and freedom.

Also, be sure to check out John's piece on Eliot Spitzer's real crimes and how DC is giving even more power to the next generation of Spitzers.

Warmongering vs. Socialism

Paul Gessing is very worried that a John McCain presidency would increase injustice and violence through continued (expanded?) war on the world. I am concerned about this, but I wonder if bad economic policy isn't worse, especially given the socialist leanings of the current Congress.

The Financial Times had this to say about the Democratic candidates on economics:

Barack Obama, now the favourite to secure both the nomination and the White House, once had intelligent things to say about trade. He has lately positioned himself as a hardliner among the hardliners...Mr Obama and the Democrats have been seized with a kind of intellectual and political cowardice. The implications of this lack of spine are grave – and extend beyond economics. The next Democratic administration promises to repair US alliances and standing in the world. A worthy aim. Yet its first act, the party says, will be to tell its closest neighbours that the rules they are all agreed to are defunct – and if they do not like it, tough luck.

/KDR

Fed to Blame?

Could the Fed have done better, or is it hopelessly flawed (and should be abolished)?

A list of criticisms here.

Thoughts?

/KDR

Undo the Obstacles to the Manifestation of Comparative Advantage

TFL’s newfound friend and commenter ACC appears to be quite knowledgeable about the intricacies of the Ex-Im Bank. I am in this sense at a disadvantage. ACC does, however, give us an opportunity to go back to square one on important concepts.

Today, let’s go back to “comparative advantage.” ACC says:

This cuts to the issue of whether or not one believes that promoting exports at all is a "good" thing. If you believe at all in the theory of comparative advantage, you probably would think that it is.

My take: the notion of comparative advantage is an observation, not a call to arms. When markets, goods and services flow freely and peacefully, it liberates people to do what they do best. It also tends to aggregate in nation states. The US, for example, does technology more effectively than Switzerland. The Swiss do chocolate and watches effectively.

These advantages can and, most of the time, do evolve and arise without government intervention. The theory of comparative advantage says absolutely nothing about “promoting” anything. Some promotion does happen, to be sure. Whether such promotion works to increase the prosperity of the citizenry – who can say? What is clear is that nations that do less promotion and less intervention are generally substantially more prosperous than those nations that do more, over time.

ACC also asserts:

Nor are resources just magically being shifted out of production of other goods a la Soviet arms factories eschewing consumer durables – especially in a case like Boeing -- its natural market is going to be made up of international actors by default.

This depends on what you mean by “magic.” People and corporations react to subsidies and penalties, do they not? Subsidize X, and we almost always get more X. Penalize (tax or regulate) Y, and we almost always get less Y. Call it “reinsurance” if you must, but the Ex-Im Bank is in the subsidy business. While I’m pleased to see that the Ex-Im Bank is not a drain on taxpayers, I’d remind you that there are other “facilitating” government and quasi-government entities in the mortgage and pension liability areas that appear to be ticking time bombs for taxpayers.

That’s why I advocate undoing the obstacles to the manifestation of comparative advantage. It’s a neutral, peaceful approach, not the government-as-mad-scientist, testing and tinkering with a market of people that just wants to do its thing. While he was no saint, Ronald Reagan put this point well: “Get the government off our backs.” Not just off Boeing’s back. Not just off industry’s back. Off your back and my back.

Look at it this way: If government doesn't promote exports (or production of any kind), do you honestly believe that there would be no exports or production? If yes, I humbly, respectfully, but strongly disagee.

-RC

The Mercantilist Impulse

You may also note that virtually every other major economy has their own export credit agency.

-ACC, TFL Commenter

But, Mom, everyone else is doing it.

Everyone might want to go jump off a bridge, that doesn’t mean you should, too.

A spirited, unexpected discussion here on TFL about the Ex-Im Bank. Highly recommended. I hadn’t realized that the Ex-Im Bank has been self-financing in recent years, so thank you for that fact. It has fallen on my list of most absurd government programs, but I still find it absurd.

We’ve established that industry is sometimes inefficient, and probably that government is more inefficient. The big difference, of course, is that government imposes its will on citizens, while industry must compete to attract customers. That’s a built-in advantage for industry in my book. Over time, I have a lot more confidence that Boeing can and will find customers for its products. Government intervention may seem on the surface to help make the markets – that is, the people – more efficient, but that all depends on which fact set one looks at. For example, the US corporate tax rate is intolerably high. It’s high relative to the rest of the industrialized world, even. If we want to “help” Boeing, we should start by lowering their tax rate. That’s an undue burden that certainly is putting US industry at a competitive disadvantage.

Let's see. They finance US exports that commercial banks can't finance to help US exporters compete and keep Americans working... their default rate is around 2%, AND they've returned $4 billion to the Treasury during the past decade or so. That's $4 billion MORE than the taxpayer paid to operate Eximbank.

-Tom Jeff, TFL commenter

I’d suggest reading up on F.A. Hayek’s concept of malinvestment here, Tom. In isolation, again, your case is strong. But consider the secondary and tertiary effects of government intervention, which is part of Hayek’s point. Favoring exports by policy means that industry shifts resources away from what the market wants. It’s impossible to quantify, as there are 300 million data points on any given day, signaling the market what their demands are. Suppliers react to those demands, unless government steps in. It may look good for the Treasury, but it doesn’t look good for the national economy, which expresses its preferences privately and peacefully every second of every day.

-RC

Bottoms Up

Highly recommend this short blog over at Cato@Liberty.

It shows that the lowest fifth of US citizens pay an average effective tax rate of 4.3% and tht the top fifth pay 25.5%. This includes virtually ALL federal taxes, not just income taxes. I'd like to see this data including state and local taxes, too, but this seems to be a nice snapshot of tax distribution.

Right wingers might say: See, the "rich" pay more than their fair share. Left wingers might say: Nope, they reap the greatest benefit from the society, they should be paying A LOT more.

This Free Liberal says: Why are we taxing the poorest at all? Can't we all agree that that's the place to start?

-RC

Boudreaux on the Falling Dollar

GMU econ dept chairman Don Boudreaux has a wonderful piece explaining the causes and effects of the weakened dollar:

http://www.csmonitor.com/2007/1128/p09s01-coop.html?page=1

What I think is especially interesting about this kind of matter is that the policy-makers don't seem to recognize how their anticipated regulatory action is likely one of the causes of the very problem they will attempt to solve.

Boudreaux writes:

By 2009, Democrats may well control the White House, too. Investors generally believe "that government is best which governs least." From that perspective, partisan gridlock is desirable because it keeps excessive political interference in the economy at bay. But with Democrats in control, the antitrade, pro-tax, "don't just stand there, regulate" forces will be unleashed. Such a prospect is already weighing down the dollar.[emphasis added by KDR]

The future can govern the past! Perhaps policy-makers should re-watch "Back to the Future II" for a remedial lesson. :-)

/KDR

Liberty Dollars: What's the Big Deal?

Well, the feds finally raided the Liberty Dollar folks. Frankly, I am surprised it took them so long to get around to it.

This is not to say I agree with the federal government action; I don't. I simply figured that the purpose of the Liberty Dollar was to trigger federal action in order to have a public lawsuit. That's how civil disobedience works. The feds finally fell into the trap.

Unlike many in the freedom movement, I consider the Liberty Dollar to be something of a joke. Why spend $20 for a coin with only $14 worth of silver. That's instant 30% inflation! Federal Reserve notes are a better deal, and they fit in my wallet. At least Liberty Dollars are refused by most merchants – a powerful money-saving factor.

(OK, as collectibles, Liberty Dollars may prove to be a good investment, especially after the federal raid. But as currency, no thanks.)

Some would argue that Liberty Dollars are inflation proof in the long run, that the initial 30% hit will be small compared to fed note inflation over time. However, the U.S. Treasury offers inflation-proof currency for a much lower premium: it's called T-Bills.

Yes, you pay a few percent a year to hold fed notes, but who does so in large quantity anyway? Bank CDs and other instruments usually keep up with inflation. And if you really want to short the dollar, don't buy gold, buy land! Compare land prices since 1980 with gold prices since 1980. And you get to use the land while you wait for it to appreciate.

Liberty dollars are a joke. Both the gold bugs and the feds take them way too seriously. And the reason they take them too seriously is that they don't understand fed notes.

Federal Reserve notes are not backed up by faith or by legal tender laws. The feds have nothing to fear from Liberty Dollars, and U.S. citizens need not worry about fed notes losing their value overnight due to loss of faith. Fort Knox could vanish and the fed could issue new bills with pictures of Bozo the Clown, David Duke and Hillary Clinton and people would still accept them as currency.

The reason? Federal Reserve notes have intrinsic value. They are backed up the same way the corporate bonds and stock certificates are backed up. Crack open a textbook on banking. Close to 90% of money creation is by privates banks, and the practice precedes the existence of the Fed. Federal Reserve notes are backed up by trillions of dollars of real estate, factories, and consumer durables.

If you have a mortgage, you need fed notes to keep your house. If you have a car loan you need fed notes to keep your car. If you lease office space with a contract measured in dollars, you need dollars to keep your office. No faith needed. Federal Reserve notes are backed up by debt.

Yes, there are problems with fed notes. The fed can dilute their value through open market operations. (The same holds for stocks and bonds. Corporations can dilute their values with new issues.) And debt based money has inherent instabilities. I'd like to see an equity based currency myself, though it should be backed up by more than gold.

But let us not overestimate the problems with fed notes. The result is misplaced efforts, loss of credibility – and run-ins with the FBI.

Colorado Residents Missing Rebates

In 2005, a narrow majority of Colorado residents voted to allow their state government to keep all tax revenues it took in for the next 5 years. In most states, politicians are always allowed to spend whatever they can convince taxpayers to give them, but something called the Taxpayers' Bill of Rights made Colorado different and its citizens wealthier. As Michael New points out here, in giving the state more of their hard-earned money, the average Colorado taxpayer has missed out on 910 dollars in tax rebates during the past two fiscal years.

Other states, including my home of New Mexico, should emulate Colorado's economic success by adopting Taxpayer Bill of Rights-style spending limits. Unfortunately, as Paul Jacob experienced in Oklahoma, the establishment (conservative or liberal) doesn't like limited government.

Club for Growth Assessment of Ron Paul: Fair or Hatchet Job?

The Club for Growth is a fiscally-conservative organization that attempts to elect people to Congress and the Presidency who believe in limited government and fiscal responsibility. They have been publishing analyses of each of the presidential candidates over the last few months and just recently published their analysis of Ron Paul's fiscal record.

I believe that the Club is fair to Ron as far as they go. Dr. Paul has a stellar track record on nearly all tax and budget issues. Under a Paul Administration there is no doubt that the federal government would be a fraction of its current size.

That said, as the report points out, Dr. Paul does indeed sometimes let perfect be the enemy of good. Some trade issues fall under this category although I don't share the Club's optimism about federal tort reform or the line item veto.

Not every trade agreement that comes down the pike is a good one, but I think it is hard to argue that NAFTA has not been a boon to both the US and Mexican economies. Also, NAFTA and other trade agreements are nothing but international treaties over which Congress has the final say. They would seem to pass Constitutional muster.

But the Club's major shortfall (and the shortfall of most DC-based free market groups) is the inability and unwillingness to take an honest look at the impact foreign policy has on the size of government. With the Iraq War having cost US taxpayers nearly $500 billion (just a down-payment on that war), not to mention the unnecessary creation of the Department of Homeland Security (gee...maybe the DEFENSE Department should be defending the "homeland," and dozens of other very expensive projects (Iraq embassy anyone) linked directly to our belligerent foreign policy, Ron Paul stands head and shoulders above the rest of the field. I understand why the Club and other fiscally-conservative groups don't take stands on foreign policy, but "War is the Health of the State" and anyone fighting for limited government must account for that fact.

What is Libertarian Paternalism?

Paul Gessing discusses Jacob Hornberger's position on "libertarian paternalism" in the previous post. While they both offer valuable remarks on the matter, Gessing and Hornberger are having a debate over whether incremental libertarianism is libertarianism at all. But, I don't think that is what "libertarian paternalism" -- as an idea -- is really about. I chalk this up to the incorrect usage of the term by David Leonhardt of the New York Times, whom Hornberger references.

Libertarian paternalism is about whether there is merit in government helping out by setting a default choice for the option most beneficial to the citizen.

Cass Sunstein describes libertarian paternalism as such:

The basic idea is that private and public institutions might nudge people in directions that will make their lives go better, without eliminating freedom of choice. The paternalism consists in the nudge; the libertarianism consists in the insistence on freedom, and on imposing little or no cost on those who seek to go their own way.

In an interview with EconTalk, Richard Thaler compares the government's role to a cafeteria manager who benevolently makes fruit easier to access, while making candy bars harder to reach. He does not deny them the choice of the candy bar, but he helps them make a better choice.

In Econ Journal Watch, Dan Klein dismisses this approach:

But it seems odd to drag the terms “libertarian” and “paternalism” into matters like dessert placement. What they speak of could be more accurately, if less provocatively, addressed using such terms as benevolence, discipline, delegation, propriety, help, cooperation, and so on. The terms “libertarian” and “paternalism” reside naturally in discussions of political affairs and particularly in issues involving coercive government policy. The paternalism entry of The Blackwell Encyclopaedia of Political Thought begins: “In modern use the term usually refers to those laws and public policies which restrict the freedom of persons in order that their interests may be better served”

Klein suggests that libertarian paternalism is an odd coupling and he suggests other absurd pairings:

It seems to me that Thaler and Sunstein pull “libertarian” and “paternalism” out of their normal context just to create an oxymoronic gimmick. If Thaler and Sunstein were to proceed with this kind of gimmick, we could anticipate the following papers:

“Libertarian Socialism”: A paper pointing out that sometimes patrons at a Chinese restaurant may decide to order a number of dishes and share them in common.

“Libertarian Communism”: A paper pointing out that sometimes adults such as the Jesuits at Santa Clara University live and eat and work together within a nexus of private property and voluntary association.

“Libertarian Dirigisme”: A paper pointing out that executives centrally plan the basic skeleton of activities at the worksite.

“Libertarian Interventionism”: A paper pointing out that condominium associations involve restrictions on members’ activities.

“Libertarian Repression”: A paper pointing out that, as described in Schelling (1984), individuals control their own behavior by repressing, subduing, or annihilating certain subordinate selves.

Cass Sunstein says it is not just a gimmick:

But it is not idiosyncratic to distinguish between approaches that respect freedom of choice and those that do not. Klein suspects "that the authors simply wish to reject the distinction between voluntary and coercive action upon which the very idea of libertarianism is based" (Klein 2004, 267). But that very distinction is pivotal to our argument, which opposes libertarian paternalism to nonlibertarian varieties, and which endorses the former over the latter.

Klein replies:

By adding “libertarian” to “paternalism,” Thaler and Sunstein make it seem like they affirm the libertarian distinction between voluntary and coercive. They use “libertarian”—a political call to depoliticize—to counteract the political meaning of “paternalism.” But “libertarian paternalism” is like “voluntary coercion.” Sunstein and Thaler concoct new meanings—of “voluntary” and “coercion” as much as of “libertarian” and “paternalism.”

The bastardization “libertarian paternalism” upsets people’s understanding of those terms in their critical function: highlighting the coercive nature of government intervention. In espousing government intervention, Sunstein would advance honest discourse by admitting that it is coercive and defending it as such.

The debate over libertarian paternalism is not whether incremental libertarianism is libertarianism, but whether "libertarian paternalism" offers a meaningful class of policy maneuvers and whether the very terminology undermines freedom.

/KDR

Huckabee's Smoking Ban

Presidential candidate Mike Huckabee wants a national smoking ban. He says it is a workplace safety issue and compares subjecting restaurant workers to cigarette smoke is like exposing them to radon. He asks us not to think of it as a consumer issue.

I suppose, he doesn't want us to think of consumers, because that might lead us to think of the market, specifically, the free market. (Hint: I'm in favor of it!)

We can assume most bar patrons and employees are aware of this hazard and can choose accordingly to subject themselves to the smoke or to avoid the smoke. Bar owners can choose the amount of smoking allowed which maximizes the profits enjoyed. Smoking is not an externality, as pointed out by economist David Henderson in the latest issue of Econ Journal Watch.

So Governor Huckabee, do you want to be a health nanny, or do you just find the free market unpalatable?

/KDR

Wall Street's Nanny

One of the main reasons CounterPunch continues to be my favorite left-of-center web site is they are one of the few (only?) non-Austrian/libertarian sites to recognize how the Federal Reserve benefits the elites and harms working people.

For example, see Jackie Coor's essay on how the Federal Reserve's recent actions represent a form of nanny statism designed to protect the big banks and other major financial interests from ever having to face the consequences of their reckless behavior. So those at the top of the financial system profit from Federal Reserve created booms and then are protected by the Fed from the consequences of their "irrational exuberance." Nice work if you can get it.

Instead of using the current crises to began restoring honest money, Congress is scheming to using the current problems in the market as an excuse for yet more regulations. I am sure these new proposals will be as beneficial as Sarbanes-Oxley.

Ron Paul and Bernanke

Next Wednesday, July 18, at 10:00 a.m. Federal Reserve Chairman Ben Bernanke will testify before the House Committee on Financial Services on "Monetary Policy and the State of the Economy," and take questions from Committee members, including Ron Paul.

You can watch Dr. Paul discuss economics with Chairman Bernanke at the Committee's web site.

Private Dollars Lead New Orleans Recovery

This story is really not a surprise. Private charity has always been more effective at improving peoples' lives than government handouts and examples of this in reaction to Hurricane Katrina have already been widely reported.

What is surprising is that people are so easily fooled, so often, by government officials who say "we're going to help." Things weren't always this way. In fact, after every disaster, natural or otherwise, we should mandate the reading of "Not Yours to Give," an excellent Illustration of the way government has usurped and corrupted private charity.

No Magic Wand

The Angry Economist says something I want to scream at certain radical libertoids:

Some problems are simply hard to solve. There is no magic wand. A free market can't solve them. Neither can a market constrained by the violence of the state -- although it will arrive at a different solution.

/KDR

Whole Foods, Monopolist?

Whole Foods recently struck a deal to purchase rival organic grocery Wild Oats. No big deal, right? It is a very big deal actually if you work for the Federal Trade Commission and you believe that consumers must be protected from a "monopoly" in organic grocery stores.

Leaving aside the debate over whether federal intervention to ensure competition in the organic food grocery sector is really a pressing national interest, I find the argument that the merger of these two companies is somehow "anticompetitive" quite unreasonable. If anything, the fact that Wild Oats has been losing money and yet was still able to find an interested purchaser implies that Whole Foods management sees ample room to grow the organics market and for new players to enter and expand their selections of organics.

In fact, prospects for growth and the obvious optimism expressed by Whole Foods might even spur other grocery chains like Kroger and Safeway to start doing even more in the organics sector...and where does Trader Joe's fit in to the discussion? Aren't they a competitor of Whole Foods?

The fact is that the grocery industry is highly competitive and (even after the purchase of Wild Oats) Whole Foods is a relatively small player, not a monopolist.

Hopefully the FTC will get a grip on reality before this gets tied up in court. Seems like another case of a bureaucracy looking for new dragons to slay when it might be better just to put down the sword.

The Inflation Tax

While I'm not terribly concerned about inflation and the Federal Reserve in the short run, those who are may find this amusing:

http://www.theuniverseas.com/inflate2.html

-Robert Capozzi

Politically Incorrect and proud of it

Looking for a good introduction to Austrian Economics that applies fundamental economic principles to some of today's hottest topics and is written for the intelligent layman? Look no further than Bob Murphy's Politically Incorrect Guide to Capitalism. The latest in Regnery's "Politically Incorrect" series, this could very well be to this generation of Austrians and libertarians what Henry Hazlitt's "Economics in One Lesson" was to previous generations.

The great inflation cover-up

Counterpunch is not only one of the few left-wing websites to expose the truth about the Democrats' phony opposition to the war they are also one of the few sites to talk about how the Federal Reserve benefits the elites while harming middle-and-working class Americans.

For example, Jane Stillwater details how inflation continues to erode our standard of living, even though the Federal Reserve and its' media groupies keep telling us that the Fed has slain the inflation dragon. Stillwater also exposes how the Federal Government distorts its economic figures to hide the true rate of inflation.

The biggest lies told by the state

may be found in the federal budget. Steven Rattner, managing principal of a New York investment firm, examines the budgetary facts our rulers are tying to hide from us. His findings? Even if Bush's predictions that the government accountants will be able to claim that the budget is balanced in five years, the US Government will still face trillions in long-term debt.

This is because the official budget figures are determined by using accounting tetchiness that would land any CEO in jail. For example, the official budget counts the Social Security "surplus" as a current asset in order to reduce the size of the deficit, instead of as representing money needed to help pay off a future long-term liability.

The official budget also does not properly account for the $200 billion in federal pension obligations or the $39 trillion Social Security/Medicare debt facing the nation. Rattner does not mention how the official budget understates the long-term costs of the war, which will add a couple more billions (or trillions) to the debt.

While this at first glance seems fairly depressing, there is an upside for libertarians in that these figures confirm Ron Paul's observation that we will eventually win because the welfare-warfare state will run out of money.

Hat tip Jacob Sullum.

Beckham: Not About the Money

“I don’t want to go out to America at 34 with people saying he is only going for the money.

“I am going out to hopefully build a team which has a lot of potential, that’s what excites me.”

-- David Beckham, quoted in an article about his $250 million, 5 year contract to play for the L.A. Galaxy.

It’s never about the money. Money is merely an intermediary, the transmission of which indicates the creation of a (hopefully) mutually beneficial trade. The money represents David Beckham’s expectation that he could not do better for himself otherwise, or else he would have asked for even more. The money represents all the choices he will possess in exchange for the choices he is giving up. The money represents that his presence in L.A. is worth greater than $50 million a year to the team, and a greater amount still to the fans (customers) of the team.

Wow, imagine creating $50 million a year in value! Beckham’s comments, rather than being seen as clever weasel words to avoid being branded a greedy capitalist, should be seen for the truth they hold. His presence in America could generate huge returns for professional soccer as a whole and great pleasure for the burgeoning mass of young people who play the sport and dream of becoming stars.

-- KDR

The Matter of $1

I got to experience some free-market inefficiency at the local Safeway today, where a lady, whose club card failed to work, held up the line for nearly 20 minutes to claim the $1 she would have saved with the club card.

The gentleman in front of me and I discussed how time is money and that with the price of time in the DC-area, it was tremendously wasteful for all of us in line to stand there while the woman reclaimed her money.

I even offered to give the lady a dollar to get her out of the way, a suggestion which neither she nor the cashier seemed to understand, as neither replied.

Perhaps looking at the situation holistically would reveal that in fact the situation was efficient. Perhaps the money I save from Safeway’s corporate policies – including the policy which deprives their employees of independent judgment – reduce my overall costs.

However, I’ve seen a lot of lines held up by one person’s payment dispute. Food stamps, coupons, and price inconsistencies have all been culprits. I would hope that the executives at these companies consider that they are increasing the price of their goods when people are required to stand in line. If they want to compete on price, they need to compete on time, too.

~KDR

Tyler Cowen Calls for Carbon Tax

In a recent article in U.S. News & World Report, George Mason University economics professor Tyler Cowen advocates the implementation of a carbon tax:

" Phase out all forms of capital income taxation, including the corporate income tax, and replace them with a carbon tax, including a gasoline tax. "Savings and investment boost economic growth, but when it comes to energy, global warming threatens as a major problem and our dependence on Middle Eastern oil damages our foreign policy."

Cowen is known as somewhat of a contrarian in the overwhelming libertarian econ department at Mason where even I got called a "socialist" by radical free-marketeers from time to time. I'm glad to see another sharp libertarian offering up such free liberal proposals.

Readers of this site will recall Carl Milsted's similar proposals on instituting a carbon tax.

~KDR

Trans-Texas Corridor and Sovreignty

I love Ron Paul, and while I understand that a great many Texans have concerns about the proposed Trans-Texas Corridor, I believe Dr. Paul's concerns over the sovreignty implications of this particular project are overblown.

Yes, there will be the use of eminent domain to construct this project, but this particular taking would be for public use and as Dr. Paul is well-aware, falls within the Constitution. Whether it is a desirable project or not is to be determined, but the idea that by constructing a road that is designed to transport goods from the Mexican border to other locations within the United States we are abdicating our sovreignty is confusing to me.

Trade -- even if NAFTA is more of a managed trade deal than real free trade -- is a good thing and so is the investment of private dollars (as opposed to tax dollars) in infrastructure projects. I'm not even sure why Congress has a role to play in prohibiting a road project involving Texas and some private investors.

There is still a long way to go before the Trans-Texas-Corridor comes to fruition, but I think Dr. Paul is jumping the gun in stridently opposing the road at this point.

A Desire Named Streetcar

City Council in my recently-adopted home of Albuquerque, New Mexico, will be voting soon on a project called a "modern streetcar." This costly government project, despite costing upwards of $200 million just for construction, will more likely hurt overall transit ridership than help it, yet the Mayor seems hellbent on building this thing.

Considering that it costs only $35 million to run Albuquerque's entire bus system, it seems foolish to build a streetcar that costs $28 million a mile. Light rail and so-called "modern streetcars" would never make it were it not for government subsidies and the misguided support of many environmentalists. Instead of wasting money on rail, though, the environmental community should focus on something called bus rapid transit, which is much cheaper and quicker than rail.

Pre-K in the Womb?

A recent Albuquerque Journal story discusses a study by the national Foundation for Child Development in which full-day pre-kindergarten is recommended for all 3 and 4 year olds. New Mexico's new and controversial half-day pre-K program was deemed "inadequate" by the Foundation.

I'm not sure if this foundation is funded by the teacher unions or not, but I can't think of a more effective way to create jobs for public school teachers than allowing the state to get its hands on your kids even earlier. Of course, other studies have found that starting kids even earlier in school to be costly and ineffective boondoggles.

Clearly, the so-called experts are moving quickly towards mandatory in-the-womb schooling at some point. This will clearly create a conundrum for the National Education Association which is adamantly pro-choice.

Does the Dear Leader Understand Incentives?

In last week's issue of The Economist(Apr 29-May 5) there is an obituary for a South Korean film director, Shin Sang-Ok, who was once kidnapped by Kim Jong Il and forced to make propaganda films for the totalitarian North Korean government. Especially amusing was the following:

Mr. Kim was worried that films produced in decadent, capitalist South Korea were better than those produced in the North. Perceptively, he explained to Mr. Shin that this was because North Korean film workers knew the state would feed them regardless of the quality of their output. In the South, by contrast, actors and directors had to sweat to make films the public would pay to see.

It would be hard to believe that Mr. Kim could not extend the analogy to other aspects of his command-and-control economy. It is not always a lack of knowledge of the problems of socialism that cause tyranny to continue. Those who run the beast sometimes know the evils they delivering, but choose to continue them anyways, as long as they themselves are not harmed by the system.

-- Kevin D. Rollins

Too High? Why so Low?

Bob Capozzi correctly warns us against being too ready to condemn the "gamblers" of the market from charging us prices which are "too high."

Why is it that we think one price is "too high" while another is appropriate? Certainly, $3 a gallon for gasoline is more than we were paying a few months ago, but on what grounds is it "too high?" Who determines what is a good price and what is a bad price?

To those of us who appreciate the beauty of the market -- that prices are determined by the buyers' demand curves and the sellers' supply curves -- not by some omnipotent ruler, we recognize that "too high" is a purely subjective determination. It can only be "too high" on the individual level, if an individual would rather not buy an extra unit of gas at a given price, but rather use the money for some other purpose.

Perhaps, we should be asking why prices are "so low." Afterall, can we say why prices aren't higher? Why not $10 a gallon? The same market in which plenty abounds, where most every American family has a TV, two cars, and a trip to Applebee's every Friday night, also contains the possibility for fluctuating prices. It is this dynamic system which gives us prices which are "too high." But, the only reason we think they are "too high" is that they are typically "so low."

-- Kevin D. Rollins

Uncle Sam: worse than Enron

Thanks to David Broder for exposing how the federal government is running up billions in future obligations but not reporting them on its official financial statements. Instead, one has to look at the government's obscure "Financial Report" in order to learn that the true deficit for Fiscal Year 2005 is not the widely reported figure of $319 billion but $760 billion.

The Feds get away with this by using cash, instead of accrual accounting, in the most widely-distributed financial statements. As Broder explains,"If you go to Target and buy an item for cash, it's felt in your wallet immediately. If you buy the same item on a credit card, unless you are using accrual accounting, it is disguised until the bill arrives."

Failure to use accrual accounting is a violation of the infamous Sarbanes-Oxley Act, fortunately, the federal government does not have to obey the standards it imposes on the rest of us.

Cross-posted at lewrockwell.com

Taxaphobia?

Every year my fear and loathing of the IRS and the whole tax system results in a massive panic attack right before I do my taxes. Otherwise, my life is panic free. This is why I am one of those who waits until a week or two before the dreaded day to even think about looking at a 10-40. I am wondering if any other libertarians also suffer from "Taxaphobia" and if, so, if anyone wants to join me in a class-action lawsuit against the IRS since forcing taxaphobes to pay taxes clearly violates the Americans with Disabilities Act?

Cross-posted at lewrockwell.com.

10 Worst Government Programs

Human Events is by no means a "Free Liberal" publication, but recently they convened a panel that was assigned with the task of naming the 10 worst government programs. Panelists included such luminaries as Larry Kudlow of Kudlow and Cramer fame, Walter Williams, one of the best-known economists in the country, and former House Majority Leader Dick Armey (among others). The votes are now tallied and here is what we came up with. This was a weighted vote that included some 50 federal programs. I don't necessarily agree with all of the panel's choices, but it is a good listing and should provoke discussion.

-- Paul J. Gessing

Problems with geoanarchism?

P.M. Lawrence sends along these thoughts regarding Fred Foldvary's piece on geoanarchism::

"One problem area, the biggest, is the idea that people could effectively secede as individuals if they didn't like what was on offer in a geoanarchist community. This wouldn't be true if - like landlords - all communities were pretty much the same and had taken up all resources. It would be a hollow mockery like pointing unhappy bank customers to the availability of other banks; in a country like Australia they are all much of a muchness. The problem of states would re-emerge in a different form, with the communities working like ground cover plants to make a network externality preventing any shift in the system of uniform geoanarchist communities. The only way there could be true choice is if there were other communities around that were anarchist without the "geo-".

The second problem area is that it is false that using different revenue bases than land tax would make people pay twice, once for the revenue base and once for increased rent arising from the associated services. For one thing, any such rise would of itself indicate that the group had acted to thrust costs onto individuals indirectly; they would not have individually wanted those services if they disagreed with the cost, so it reflects a failure to connect - a creation of something that governs.

But we can see more than this. The assertion would only be true if by some chance the community were a meaningless cover, allowing absentee landlords to laugh all the way to the bank. Most likely, even with a landlord and tenant split, at least the landlords would be part of the community that was not caught in this bind. But before denouncing even that as a mockery, consider that - done properly, say with a distributist approach - there would not be that split. People would not be paying rent but rather owning their own homes and resources. Geoanarchism, or even anything with that much of a Georgist base, presumes an enduring problem with landlordism and gives up on it, preferring palliative care.

Yet clearly the most that would be needed is a decent way for the younger generation to become owners in their turn, without building any concentrations of land resources. The only practicality of a Georgist solution is to deal with a transition, but it risks seducing people into abandoning a principle of non-intervention. The most I would concede against principle is to work within existing tax bases to reduce them, rather than ever raising any part or introducing a new one. At least that way, like Orpheus, we would be leaving without ever looking back.

That of course begs the question of what should be done instead, to provide a revenue base. One, it is no criticism of a critic to ask him to fix a problem before he has the right to point it out (although, as it happens, I can fix it - read on). Two, it presumes too much in a collectivist direction, rather than letting the atomist/individualist approaches have a go first; it makes a presumption in favour of collectivism. Maybe nothing should be done instead, for most things. Three, there is no reason why a community should not, itself, have a pool of revenue generating resources - apart from the very issue of whether there should be ground covering collectivities putting us all at risk anyway. This, after all, is how mediaeval religious foundations used to work, even the commanderies of military orders working at the edges of Christendom. But even they could be oppressive.

I could go into detail on this approach, but it would be going into a new although related topic, and as it happens it would amount to reinventing checks and balances for something quasi-governmental. Far better to adapt Henry Ford's advice for car components and not put it in in the first first place because 'that way it can't break and it can'tn fall off'."

But we can see more than this. The assertion would only be true if by some chance the community were a meaningless cover, allowing absentee landlords to laugh all the way to the bank. Most likely, even with a landlord and tenant split, at least the landlords would be part of the community that was not caught in this bind. But before denouncing even that as a mockery, consider that - done properly, say with a distributist approach - there would not be that split. People would not be paying rent but rather owning their own homes and resources. Geoanarchism, or even anything with that much of a Georgist base, presumes an enduring problem with landlordism and gives up on it, preferring palliative care.

Yet clearly the most that would be needed is a decent way for the younger generation to become owners in their turn, without building any concentrations of land resources. The only practicality of a Georgist solution is to deal with a transition, but it risks seducing people into abandoning a principle of non-intervention. The most I would concede against principle is to work within existing tax bases to reduce them, rather than ever raising any part or introducing a new one. At least that way, like Orpheus, we would be leaving without ever looking back.

That of course begs the question of what should be done instead, to provide a revenue base. One, it is no criticism of a critic to ask him to fix a problem before he has the right to point it out (although, as it happens, I can fix it - read on). Two, it presumes too much in a collectivist direction, rather than letting the atomist/individualist approaches have a go first; it makes a presumption in favour of collectivism. Maybe nothing should be done instead, for most things. Three, there is no reason why a community should not, itself, have a pool of revenue generating resources - apart from the very issue of whether there should be ground covering collectivities putting us all at risk anyway. This, after all, is how mediaeval religious foundations used to work, even the commanderies of military orders working at the edges of Christendom. But even they could be oppressive.

I could go into detail on this approach, but it would be going into a new although related topic, and as it happens it would amount to reinventing checks and balances for something quasi-governmental. Far better to adapt Henry Ford's advice for car components and not put it in in the first first place because 'that way it can't break and it can'tn fall off'."

Assume We Do

Scott Adams has a very funny Dilbert today about making assumptions based on assumptions to make business decisions. It isn't just economists who are prone to make an "ass out of you and me."

Like the old joke (courtesy of Alan Xian Yang's website):

"Q: How many mainstream economists does it take to change a light bulb?

A: Two. One to assume the existence of ladder and one to change the bulb."

Or perhaps even worse:

"Q: How many Chicago School economists does it take to change a light bulb?

A: None. If the light bulb needed changing the market would have already done it."

Of course, there are plenty of things that need doing but haven't been done for one reason or another. Creativity and individual initiative are still needed to make the free-market a nice place for us to live. If everyone sat around assuming that someone else would do everything, not much would get done.

-- Kevin D. Rollins