Category Archives: political economy

A Tax Reform Idea

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Close, but no cigar.  Here are some ideas that are being kicked around.

…the president is pushing for tax incentives for making products, especially high-tech ones, in the US.  He also wants more focused federal research programs, including funds for new privately run institutes to study advanced manufacturing techniques.

Senator Debbie Stabenow (D, MI):

…legislation that would give tax breaks to help companies cover the cost of moving production back to the US and ban tax deductions for the expenses of moving operations abroad.

Congressman David Cicilline (D, RI):

…federal grants to help companies upgrade equipment and retrain workers.

Republican Presidential Candidate Mitt Romney has these:

…repealing “excessive” regulation in such areas as environmental protection.  He also wants to require secret ballots for union-certification votes, which might make it harder for organized labor to win.”

The Democrats want Big Government solutions—that are careful to keep government’s hands in business’ pockets—and solutions that simply make an already excessively convoluted tax code even more so.  Romney’s ideas don’t even address the tax question; although they would help business.

No.  Instead of that claptrap, simplify and reduce.

Get rid of the tax subsidies.  Get rid of the tax credits.  Get rid of business regulations that do not actively support productivity improvement or enforce contract law—contracts between businesses and suppliers, businesses and customers, business management and business employees.

Lower—if not eliminate—tax rates on businesses.  They’re not the ones paying the taxes, anyway; their customers pay them in the form of higher prices, so that a tax on business is simply a second tax on private American citizens.  Including those 50% who pay little to no income tax of their own; including seniors who have only a fixed income with which to pay for their necessities.

On Rocket Science

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Here’s an excerpt (the second video at the top of the article) from an interview Fox News‘ Megyn Kelly had at the Republican National Convention Tuesday with Mia Love, Mayor of Saratoga Springs, UT, and Republican Candidate for the House of Representatives from Utah’s 4th District:

Megyn Kelly: How do you use that [her father’s advice about not being a burden on society, about giving back instead] in your life?

Mia Love: Well, if you think about it, as Mayor of Saratoga Springs, I have to ask myself several questions before I make any new commitments: is it affordable, is it sustainable, is it my job?  I’m doing everything I can…to make sure we have a fiscally sound city.  It’s not rocket science; the most I’ve done is really step out of the way and allow the economy to thrive, allow businesses to come in and add resources….

That’s clear enough.  Works at the national level too: get government out of our way.

Renewable Energy

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Has German Chancellor Angela Merkel figured out something Barack Obama hasn’t?  As recently as last June, her government had set a goal that by 2020, renewable energy (vis., wind and solar) would comprise 35% of Germany’s electricity production.  In the first half of 2012 (ending that June), Germany already was generating 25% of its electricity from wind and solar, among other renewables.

Then some other things became apparent.  Germany’s Renewable Power Act requires power companies to buy wind- and solar-originated electricity in significant quantities.  Their largest industrial electricity users consume 18% of the electricity produced,  However, they pay only 0.3% of the extra costs generated by those required buys—German taxpayers pay the difference.

The power grid hasn’t kept up with the growth in alternative energy sources—like the offshore windparks in the Baltic and North Seas off the country’s north coast.  Many of those projects are at a standstill, with no way to deliver the power they generate to the mainland.

That Renewable Energy Act provides incentives to build wind turbines, but it doesn’t provide incentives to build the natural gas-fired power plants the country needs for when the sun isn’t shining and the wind isn’t blowing (see the figure).

Withal, German consumers are faced with skyrocketing electricity bills.

Now Merkel is changing her mind.  She; her Environment Minister, Peter Altmaier; and her Economy Minister, Philipp Rösler are meeting with industry and union representatives “to discuss the rising costs for consumers.  In the run up to that meeting, Altmaier has indicated that he hopes to…put the brakes on the current rush toward renewables.”

In the US, we have these: green energy subsidies (guaranteed loans, tax credits) and a Federal requirement that power companies buy power from renewable energy producers.

Off the New England coast, special interests found the views from their beach front manses would be offended by wind farms, and the potential farms themselves were declared a “hazard” to aircraft, so they are not even being built.  In central California, environmentalists won’t allow some solar farms to be built and won’t allow the power cables that would deliver solar electricity to cities to be built.

The EPA still requires ethanol to be blended into our gasoline, even though not enough of that is being produced to meet EPA requirements, much that is produced is exported, and the whole charade is driving up the cost of food.

Maybe we should, in  this case, try Obama’s meme of being more like Europe, or at least more like Germany.

Government Market Intervention European Style

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From The Wall Street Journal we learn that that the European Central Bank wants to “manage” the interest rates on member nations’ sovereign debt instruments, and it wants to do so by entering the market for government bonds—announcing its buys and sells in a manner intended to “influence” the market’s interest rates imposed on those governments’ borrowings.  The WSJ quotes the ubiquitous “person familiar with the matter” as saying

ECB would guide investors toward a target, or range, for government bond yields of Spain and others by publicly communicating specifics about the amount of the bond purchases it conducts, as well as the details on the types of bonds it buys. For instance, if the central bank says it bought €1 billion ($1.26 billion) worth of shorter-dated Spanish bonds, it could move investors toward the yields it deems appropriate by raising or lowering purchases in subsequent weeks.

But the real thinking was revealed by the ECB’s President, Mario Draghi.  “Exceptionally high” risks are embedded in many government bonds markets, the WSJ cites him as saying, and to the extent to which these “risk premia” include a euro breakup scenario, they are “unacceptable.”  Thus, the market should sit down, shut up, and do what its betters tell them to do.  Investors’ pricings on exploding debt will not be tolerated.  Their duty is to simply keep lending at rates their Betters dictate.

Never mind that, as the Bundesbank’s Jens Weidmann puts it,

In democracies, Parliaments, not central banks, should decide about such comprehensive sharing of risks[.]

He’s not one of the Know Betters, so he’s just whispering in the wind.

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Then we have this from Spain, in particular.  The government says it expects the Spanish economy to contract 1.7% this year, despite growing exports (from the declining euro more than any real productivity-related effects), and it will contract next year by an additional 0.5%.  Yet that same Spanish government fully intends to impose “billions of euros” in tax increases over these next two years (along with allegedly large spending cuts).  You read that right.  In a contracting economy, the government fully intends to take a ton of money out of the private sector: it intends to defund the very part of the economy that is the engine of economic prosperity—and here, of economic recovery.

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And then there’s this.  The Obamacare Independent Payment Advisory Board, consisting of “15 philosopher kings,” is starting to be set up, although we don’t get to know who these kadi are until after the election this fall.  This Board will have the power to dictate prices to all participants in the health care industry: hospitals, doctors, insurers, patients alike.  No market forces at all here.  And yes, there will be plenty of patients: customer participation is mandatory.  Of course there’ll be fewer and fewer providers as these are driven out of business by the Board’s price controls; this will turn the Board into a Death Panel.  A third example of government market intervention European style.

Government Spending

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Much of this originated as a comment to a Gay Patriot post.  I strongly recommend the post and then the accumulating commentary.

It’s important to note at the outset that government has no money of its own.  It only can act as intermediary in the (forced) process of transferring money from one group of private citizens to another.

Now a few remarks on government spending.  First, much of the money taken from private individuals and/or their businesses (which are just agencies of private individuals) to pay for government spending is lost to friction, including outright waste (I won’t get into losses to graft.  Could the graft be identified, it’d be rooted out.  Right?).  The waste includes money spent on government middlemen, money spent on government contractors hired to oversee the transfers and transferees, time and money spent schmoozing with lobbyists (both the good ones who are only identifying constituent needs—Congressmen generally fit this bill, for instance—and the bad ones, who are sure to take a taste of their own as the money flows, or to provide some vig in return for future consideration), and so on.

Second, money taken from private individuals to pay for government spending—whether through current taxes, current borrowing (future taxes), or printing money (future inflation)—is money that is not spent in the private sector, or husbanded against future spending in the private sector.  Thus, the multiplier effect of government spending, such as it is, is cancelled, if not exceeded, by the known, and fairly large, multiplier effect of private spending that is lost.  In many sequences of private spending, for instance, that multiplier effect runs out to 1.7x.  The best Keynesian estimate for the government spending multiplier is 1.5x.

Third, those husbanded funds generally are deposited in financial institutions as savings, and these deposits then are loaned to borrowers: these deposits are the primary source of loanable funds.  Taxes, then, reduce the amount of private money available for saving and so reduce the amount of lending that can occur.  This effect isn’t enough to cause a credit crunch like the one coming out of the Panic of 2008, but it hasn’t helped.  Further, that future inflation from printing to support excessive public borrowing devalues the funds that are saved.

There’s more.  As government debt grows, more private funds become husbanded, not against future spending goals in the private sector, but against those future taxes.  And even more borrowing is encouraged by that inflation (in the period before the recession that is the inevitable result of that high inflation)—in both the private and government sectors—since the repayment will be with inflation-devalued dollars.  Then that inevitable recession hits, and payback becomes, as they say, a bitch.

In sum, government spending isn’t zero-sum, it’s negative sum.

Update: clarified the second point.