Category Archives: political economy

The Campaign and My Choice

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With this post, I conclude my short series consisting of my analyses of the Republican candidates for the nomination for President.  To recap, I limited my discussions to three candidates: Mitt Romney, Herman Cain, and Rick Perry.  The structure of this series consisted of a collection of posts concerning what I didn’t like about the candidates and then a series of what I did like about them.  This is my endorsement of a single candidate.

None of the candidates have adequately addressed the matter of illegal immigration and of illegal aliens.  Some have taken a hard line toward sealing and controlling our borders, and this is entirely appropriate.  However, controlled borders are only half the problem.  The vast majority of the illegal aliens are present in the United States because they want a chance to participate in the American dream, to avail themselves of the benefits of America’s exceptional culture.  They would be highly productive and valuable citizens were they given the chance.  Yet we throw up roadblocks after barriers after obstacles to impede them.  It can take a couple of months to get a non-immigrant visa; B-1 visas can take a month, H-1B visas as long as six months, and the H-1Bs have very low annual quotas. It shouldn’t be that hard to enter the United States legally.  There should be border crossing stations every mile along our border (which, just incidentally, would put the human traffickers—the mules, and worse—immediately out of business).  Visa approval should occur in days, not months (in today’s computerized world, it shouldn’t take months to run a background check), and there should be no quotas.  With none of the candidates addressing this aspect of illegal immigration, their handling of immigration generally is, in this context, I think a wash.

Perry: Perry’s attack ad campaign is tactically foolish and so calls in to question his judgment.  The Republican candidates should be running against Obama and touting their own superior qualities for that task; they should not be attacking each other and giving the Progressives ammunition for the Presidential campaign.

When asked, in Tuesday’s Dartmouth University debate, to be specific about his economic plan, Perry repeatedly said he’d unroll his plan “over the next three days.”  When Romney asked him directly, he responded that Romney had been developing his plan over the last five years, whereas Perry had been developing his only over the last 6 weeks.  This was pretty weak and smacked of excuse-making, especially since Perry has been governor of the second largest state for the last 11 years (and he’s not yet passed up a chance to remind us all of that), and so he has considerable experience at developing economic plans.

Finally, Perry doesn’t communicate well in a fluid environment.  A man who can’t think on his feet isn’t Presidential material.  A Texan who can’t is disappointing.

Romney: Romney’s responses concerning Romneycare and Obamacare in the Dartmouth debate increased my confidence both in his willingness and his ability to repeal Obamacare were he to be elected President, and it showed an ability to respond to Democrats’ attempts at assimilation of Romneycare into Obamacare.

He also has a 160 page Economic Plan, with 59 policy proposals in it.  However, it isn’t that hard to fix our economy and government’s interference with it by limiting spending to less than revenues.  This isn’t rocket science.  This is a Technocrat is overcomplexifying things.

His evasive generalities in response to other economic questions, though (Cain: “can you name some points in your 59-point complex economic plan?”  Romney: <mumble>), indicate to me that he still hasn’t very many specifics fully developed.  And he doesn’t seem willing to get specific; would he take a stand on specifics in dealing with Congress?  Yeah, yeah, I said he’d take a stand here, but his Dartmouth performance makes me wonder about his constancy.  His campaign has been one of avoiding mistakes rather than of advancing concrete ideas.

Finally, at a campaign stop the day before the Dartmouth debate, The Daily Caller asked Romney whether current AG Eric Holder should resign over his performance with DoJ’s Fast and Furious.  Romney’s answer was lengthy and evasive—it took him 35 seconds to say he wasn’t going to say.  When the question was repeated later to Romney’s aide, Eric Ferhnstrom, the aide said Romney “prefers [press] availabilities like this, where his thinking is more organized, as opposed…answering questions on the fly. He doesn’t think that’s conducive to a good conversation.”  See my remarks above about thinking on one’s feet.

Romney is no Eric Cantor, or Paul Ryan.  Or Newt Gingrich.

Cain: Cain’s up from the ranks experience in small businesses and large are a serious plus: in a free market, the entrepreneurs, small businesses, and large businesses are in a positive feedback loop, and that’s a strong economy with a plethora of opportunity.  Cain understands the limits to government effectiveness in that environment, and he understands the necessary fixes, simple fixes.

I like his view of making every section of government justify its budget in detail.  That’s not zero-based budgeting, but it’s close enough, and it’ll work well if not done too often.  He’ll never pull it off, but the threat of it will have its own benefit.

In the Dartmouth debate, he faced serious criticism for the first time: now he’s one of the front-runners, and so a target.  His ability to keep his humor, while providing specifics (he was subject to an “insider” cheap shot when he refused to violate a confidence concerning a couple of possible nominees for his administration) rather than evasion or generalities was refreshing.  And he was able to defend those specifics.  On the other hand, he wasn’t often seriously challenged: “turn 9-9-9 upside down; the Devil is in the details?”  How cute.

His consumption tax is a serious problem, but that can be worked.  Overall, his tax proposal represents a lower set of rates for individuals and businesses, and that’s all to the good: the more of our money left in our hands, under our judgment, the better off our country will be.

In the end, my preference is Herman Cain.  He has the best ideas, and he does, if not the best job, at least a very solid job of presenting and selling them.  And, crassly, it’ll be difficult for the Progressives to keep playing their race card on anyone who disagrees with Obama.  Although we might hear mutterings of Uncle Tom, or Oreo.

Rational Expectations and Jobs and Progressives

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Rational Expectations is the economic theory that people act rationally, by and large and in their aggregate, in their decisions in the market place.  That is, even in the face of incomplete information, people generally form logical predictions about their future, and they act in a logical manner within the framework of their predictions.  Of course, information used in those logical predictions includes government’s actions in the market and people’s own view of what those actions will produce, independently of what government officials might aver.  And of course, in the face of incomplete information, mistakes are inevitable, both individually and across the economy.

The Progressives in government, despite the empirical evidence to the contrary from FDR’s failed Keynesian spending and Obama’s Keynesian Stimulus Act in 2009, instead insist that government spending is stimulative in and of itself, and government taxing is irrelevant to Americans: we will make no predictions from government spending, and we’ll simply accept the taxes as part of our environment; we’ll form no rational expectations of the future from these actions.

Against this backdrop, what are we to make of the Obama Jobs Bill just defeated in the Senate?  Here are the essential components of the Obama proposal:

  • $175 billion in new spending,
  • included in this was $44 billion to cover an extension of unemployment insurance even beyond the present 99 weeks of paying people for not working,
  • a further reduction in the employee’s payroll tax, a parallel reduction in the payroll tax of employers whose payrolls are $5 million per year or less, with this payroll tax reduction set to expire in 15 months, and
  • a permanent surtax of 5.6% on millionaires.

In the Progressive fantasy economics world, employers were to rush right out and hire workers, knowing that just having them on the payroll 15 months from now, their payroll tax cost of these new employees will double.  Never mind that it takes that long in a modern economy for an employer to begin to recoup the hiring and training costs of a new employee and for the employee to become productive.

Also in this world, the new employees in their temporary jobs, and existing employees with their temporary increase in take-home pay, will run right out and spend that money on everything they’ve ever wanted, and the stimulus is carried through.

Finally, in this fantasy world, the millionaires will simply not respond to their new tax: they’ll keep right on doing whatever it is they so nefariously do with their ill-gotten gains.

Here’s what rational expectations says Americans will do, and what we already did, for instance, with Stimulus I in 2009 and with the prior temporary payroll tax reduction (and the one time payments from the Economic Recovery Payment program and the Making Work Pay tax credit).  The fourteen people nationwide who actually got jobs out of Stimulus I did increase their spending, but not by much: they used as much of their windfall as they could to cut into their debts, which had increased sharply as they tried to cover necessary expenses while having no income.  We didn’t spend those payroll tax reductions, knowing they were impermanent—knowing, even, how short-lived they were.  We didn’t spend those one-time payments, either.  Instead, we saved them against future needs, trying to rebuild our savings, or we paid down our debt.  Employers didn’t hire, accurately predicting into the future that those temporary reductions would expire and their costs would expand suddenly and sharply.

The 99 weeks of unemployment payments already have led to a level of extended unemployment duration unmatched in decades: nearly 45% of those currently out of work have been in that state for more than 6 months.  As any freshman Econ student understands, when government subsidizes a thing, government gets more of that thing.  And so it would have been with the proposed extension in unemployment insurance beyond those 99 weeks.

And those millionaires with their shiny, new tax?  They were going to do what any rational human being does: adjust their incomes and investments so as to mitigate the effect of that tax: these job producers, these owners of businesses, were going to reduce their exposures—and not hire more workers in the process.  Those would have been permanent adjustments to their permanent new tax.

These rational responses to temporary government actions were such a complete shock to the Progressives since Stimulus I and those one-time “stimulative” payments that they simply denied the responses occurred.  This is why the Obama jobs bill, thankfully defeated in yesterday’s vote, was proposed in the first place, and why it was structured as nothing more than Stimulus I Reduced.

This Progressive move is part and parcel with their attitude toward the intelligence of the workaday American: we’re just too stupid to think for ourselves.  We’re not capable of behaving rationally.  This is also demonstrated by their mantra that our problem, the reason we don’t just blithely follow them over the cliff, is that we’re too stupid to understand their message.  They must keep adjusting how they communicate with us because we just didn’t get it the first time.  Or the second.  Or the umpteenth.  And so, since we’re too dumb to form rational expectations, their interminable Keynesian spending is perfectly sound economics.

Progressives actually argue, with a straight face, that their programs have saved or created millions of jobs.  Here’s one example of how well that’s actually worked, in the Progressives’ precious “green jobs” milieu, and how honestly their accounting has been done.

Finally, no Progressive (or modern Conservative, come to that) has been able to show that the “recovery” currently in “progress” is due to the “stimulus” bill passed in 2009, or due to the stupendous Federal spending and even more stupendous Federal borrowing, generally, or to some combination of these.  They cannot offer any evidence that whatever anemic recovery might be in progress is due, instead, to an ordinary, normal business cycle recovery.  A recovery that has, in fact, been held back by all of that spending and borrowing, just as the nascent economic recovery in 1937 died shortly after birth from the Federal spending and borrowing and free market interference of FDR.

Greed and Envy

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Caution: long post….

Greed is wanting more than we have, not because we need more, but simply because we’re dissatisfied with what we have.

While Dante defined envy as “a desire to deprive other men of theirs,” modern usage stems from another meaning: a painful, even resentful, knowledge that someone else has something that we lack, and we want it, too.

But “Greed is good,” Gordon Gecko said, and he wasn’t far wrong.  More accurately, we should never underestimate the power of greed to do good in the world.  Envy is a part of this, in a way; it’s another aspect of greed: it can give a focus to what it is we want that’s more than what we have: sometimes we want that specific thing that he has, if only because he has it already.  Adam Smith understood this; these are his invisible hand.

To greatly oversimplify things, here’s how that invisible hand works.

A man wants something he doesn’t have; he may not be entirely clear on what it is, but he can describe his shortfall at least to some extent.  Another man offers to develop and then make a widget which he says will generally satisfy the first man’s shortfall.  He’ll then sell it to the first man if he will pay for the labor, materials, and a little extra for a profit.  The two agree on the terms of the transaction, and in short order, one man has a widget he didn’t have before, and the other man has some money he didn’t have before.

Another man sees the first man’s widget and tells the second man he wants one like that.  A conversation occurs, and in short order the third man has a widget, too, and the second man has a bit more money.

Soon a fourth man approaches the second and says that if the second will make a bunch of widgets, the fourth man will buy them all and resell them elsewhere.  Now lots of people have widgets, the widget maker has much more money, and a seller is making money.

A fifth man comes along and says this to all those who’ve bought widgets: “All your widgets look alike.  I have a fine selection of gee-gaws that you each can add to your widget to make it a truly unique possession, which no one else has.”  And others see the gussied up widgets and want—and conclude transactions to obtain—widgets that are just like this man’s, or just like that man’s.

A sixth man says he can improve on the widget: he can make a Widget DeLuxe, or a wodget, either of which is better than even a gussied-up widget.  And so on.

All of those original players—buyers, developers, manufacturers, sellers—are better off for these free exchanges: each has, as a result of the exchanges, something of value to him that he didn’t have before, and he got it at a price he considered worth paying—whether in labor or in money—in order to get that thing.  On top of that, additional jobs were created—additional sellers; manufacturer helpers; after-market developers, manufacturers, and sellers—and these new job holders are all better off than they were before: they have jobs, now, and the wherewithal to buy widgets, if they wish.

In all of this economic growth, in all of this wealth increase, greed and envy played their roles in driving the system.  Every participant acted on his own self-interest, every participant did what he did to satisfy himself alone.  Yet as a result of the interactions of these individual self-interests, these individual greeds and envies, everyone in the system became better off.

It’s true that the wealth distribution was uneven.  In this simple scenario, the original widget maker seems to have the largest gain, and the sellers seem to have the next largest.  But even the meanest widget buyer is better off now than he was before, and he’s better off in a way that would have been impossible without this commerce: he has a widget he couldn’t even contemplate before because it didn’t exist before, and he has options for a better widget or a wodget, as well.

Notice a critical aspect here, though.  This system was a free market, within which participants to an exchange were able to come together and reach their agreements along parameters that were entirely agreeable to them, and to them alone.  No one was forced into an exchange he didn’t want, no one was barred from an exchange in which he wanted to participate, and each one was free to act solely on his own desires.

Greed and envy are two-edged swords, though, and they certainly can overwhelm a free market.  There is a role for government intervention, and it is to protect all of us from the plainly rapacious.  But that intervention must work to preserve free market mechanisms—the very mechanisms that channel our venalities and convert them to accidental strengths for our common good. This kind of government intervention must enforce contracts, and it must ensure transparency so that every participant can readily understand what it is he is getting—or selling—when he enters that market for his own selfish purposes.  But it must leave each participant free to act in his own self-interest.

When the market isn’t free, when the market is centrally controlled—even when the market is nominally free, but government intervenes too much—the capacity of commerce to turn greed and envy to our common betterment is overwhelmed.  When government intervention favors this or that selected group, for instance—one group didn’t get as wealthy as another, let’s say—then our greed and envy are simply channeled away from functional (if accidental) cooperation for the common good toward simple, resentful, isolated greed and envy: “Why do they get special treatment?  Why can’t I, too?”  Members of the other groups—whether government-designated groups or self-styled (now that government has set a precedent of special groups for special treatment)—stop working to gain the wherewithal to buy, they stop working to produce.  These groups insist, instead, that government intervene in their favor, too.  In short order, the market is no longer producing, and wealth and well-being deteriorate.

Thus, government intervention too easily suppresses the essential cooperative nature that is men and women acting in our own self-interest—including our own greed and envy—to arrive at exchanges voluntarily between those of us who want and those of us who have, or can produce, or can create.  Intervention cannot look to control the forces of the free market, to control by government fiat our greed and envy, without destroying that free market.

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary,” James Madison wrote.  But we’re not, and they don’t; we must limit government’s market interventions, as we must government’s power generally.  Greed and envy are part of our nature, but only a free market has the capability of channeling those base parts to our collective benefit.

Tax Reform = Flat Tax

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Caution: long post….

President Obama and his Progressive Democratic Party insist that all of us should pay our “fair share” of the nation’s tax requirement.  I agree: all of us should pay our fair share.  The top 10% of Americans by income paid nearly 70% of the total personal income taxes collected by the Federal government in 2008, while the bottom 50% paid nearly 3% (that’s no typo) of the total in 2008.  Further, the rich may be getting richer, but they’re also paying more in income taxes.  In 1999, those top 10% paid a little over 66%, and the bottom 50% paid 4% of the total.

It’s time to reform the tax code and make it easy for all of us to pay our fair share.  In 2007, according to Census Bureau data collected from IRS-aggregated Form 1040 filings, Americans earned $17.8 trillion dollars from all sources: wages and salaries, interest payments, dividends and capital gains, gambling earnings, pass-throughs from their small businesses, and so on.  According to Government Accounting Office data for that year, Americans paid an aggregate of $1.15 trillion dollars in taxes on that income.  The present tax system is perceived as unfair by all participants, and they have arguments for their views.  Progressives view the rich, paying 70% of the total tax receipts, as not paying enough to be fair.  On the other hand, modern Conservatives consider that the bottom 50%, paying little to no taxes, also to be not paying enough.  Further, the complexity of our tax code is proverbial; not even professional tax accountants understand it well, and the IRS’ own advisors often provide erroneous help to inquiring taxpayers.

Our personal income tax code should be simplified, with the various filing statuses and tax brackets replaced with a single filing category and tax bracket.  Each household should pay a single, flat rate: all income above a level equal to half the then-current year Federal Poverty Income Guideline should be taxed at a rate of 10%.

Tax breaks, tax subsidized transfers, deductions for this or that expense—including the mortgage interest deduction and medical expense deduction—should be eliminated.  Note that this will include the standard deductions for family dependents; the Poverty Guideline includes an adjustment for family size.  Further, the elimination of all those deductions, credits, exceptions, and so on will greatly reduce the ability of special interest groups, and of politicians generally, to manipulate the tax code for their own ends.  The removal of the market distortions created by using tax policy for social engineering and wealth redistribution will lead to falling prices for those subsidized goods, and it will make it easier for all participants in the market—we Americans—to make our own decisions.  Finally, this equal percentage paid by all still leaves the actual dollars paid in taxes quite progressive: a man making $20,000 per year above that exempted income amount will pay $2,000 in Federal income tax.  A man making $200,000 per year above that same exempted income amount will pay $20,000 in Federal income tax.

The present corporate tax structure leads to the following distortions (among others) of business incentives in the United States: because it is imposed on income from capital, it biases decisions about how much to save and therefore influences overall capital investment and business growth.  It also creates a bias in favor of financing through the use of debt.  Further, because the law treats a corporation as a separate taxable entity, from which shareholders subsequently receive a portion of their income in the form of dividends or capital gains, the relatively beneficial tax treatment of capital gains under the personal income tax code creates a bias against paying dividends.  Finally, because the corporate tax code also uses schedules for depreciation that do not correspond to real wear and tear on equipment, it creates a bias in investment and production toward those capital assets more lightly taxed.

From these high, complex, and in some cases unrelated to reality, tax requirements, we can see that our corporate tax code discourages foreign companies from investing in the US or from setting up branches of their operations in the United States (known as “insourcing” in the same way American companies sending work outside the US is known as “outsourcing”).  Our tax code also creates incentives for American companies to build their new branches in other nations with lower corporate tax rates (Ireland, for instance, before it was dragooned into accepting an unneeded European Union bailout, taxed corporations at 15%).  Both of these incentives tend to reduce employment in the US, since the companies involved opt for foreign locales.

It’s time to apply a flat tax to corporations, also, and that corporate rate also should be 10% of all income (note that, even though the government and the Courts have said that corporations are “persons,” there are no Federal Poverty Income Guidelines for corporations, thus there is no income exemption here), both domestically earned and foreign-earned.  Tax subsidies, deductions, credits, and so on should be eliminated.  The elimination of these will have the same decision-making outcomes and economic effects as their elimination from personal income questions: the biases will disappear, and free market participants will make their own decisions.

To be sure, there will be disruptions in various markets while the changes ripple through the economy, but with the simplified code, compliance will increase (an increase in revenue for the government), and more importantly, the net result of the elimination of the market distortions will be a small decrease in overall prices that will go along with wages and salaries that have not dropped commensurately (wages do not fall at all as rapidly or as easily as do market prices).

There have been suggestions of having a national sales tax in lieu of any sort of income tax.  A tax on consumption would amount to everyone paying “their fair share,” and it would represent a great simplification of the Federal tax code.  The simplification argument could certainly be true.  However, a consumption tax would hit the poor much harder than it would anyone else.  Some consumption is absolutely necessary and cannot be avoided.  Everyone must buy food, everyone must make rent or mortgage payments, everyone must pay transportation costs of some sort.  A tax on these necessities would be a cost to the poor disproportionate to the costs others are paying: a consumption tax is regressive; there is nothing flat about it at all, in any way.

Some will argue that the poor could get a tax refund at the end of the year, based on some rule for refunds, just as income tax refunds are available now.  This, though, does not address the current tax burden that they would have to suffer for an entire year before they could get that refund.  Their cash flow would suffer, and later remediation would do nothing to eliminate the ongoing pain.

Others will argue for not taxing food, or fuel, or rent payments.  Making such exceptions, though, would only be the camel’s nose in the tent.  There are always worthy causes that should receive special tax treatment.  If we start making such exceptions, we will very shortly have a consumption tax code every bit as Byzantine as our present income tax code.

Yet others will argue that a flat income tax is itself regressive, and more so than a consumption tax.  However.  A tax on income does not hit those who do not work, but must still buy necessities.  A tax on income, in fact, is completely independent of the market choices anyone makes.  Compare, also, the amount of consumption taxes paid by the two men in our example above.  Let’s assume, for the sake of argument, that actual necessities—food, housing, and transportation, for instance—cost $18,000 per year.  Let’s assume, further, that comfort-level expenses—dining in restaurants, a better house, a fancier car, a better entertainment system, music and movie DVDs, for instance—cost an additional $18,000 per year.  Finally, let’s assume a consumption tax rate of 10%.  Our man making those $20,000 above the exempted amount is going to pay all of those $18,000 for necessities—those expenditures are unavoidable.  Let’s assume that, as a responsible adult, planning for his family’s future, he splits his remaining $2,000 of income between savings and comfort-level expenses.  His sales tax bill, then, will be 10% of $19,000, or $1,900: a slight reduction in his tax bill compared to his flat tax bill.  Let’s say our man making those $200,000 above the exempted amount buys all of those comfort-level items in addition to the necessities; his consumption expenditures, then, are $36,000, and he has a consumption tax bill of $3,600.  He’s paying less than a fifth of his flat income tax bill.  Indeed, our “rich” man would have to spend, voluntarily, 95% of his income on consumption alone—as our “poor” man had to do—in order to have the same relative consumption tax bill.

Tax reform is a flat tax.

The Blessings of Government

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Candidate for Senate from Massachusetts, and late of the Consumer Financial Protection BureauAssistant to the President and Special Advisor to Treasury Secretary Timothy F. Geithner, Elizabeth Warren, recently had this to say about our need for big government:

There is nobody in this country who got rich on his own. Nobody. You built a factory out there—good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for….  You built a factory and it turned into something terrific or a great idea—God bless, keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay it forward for the next kid who comes along.

There are some thoughts on this statement.  I paid for those roads, too, not just “the rest of you.”  And that’s a legitimate tax: fostering the free exchange of goods, as well as fostering their easy production, by free citizens is part of the government’s job: under our social contract—the one actually in existence via our Declaration of Independence and our Constitution—the government’s sole job is to protect those individual liberties.  And nothing more.

On the other hand, “the rest of you” didn’t pay for the education of the workers I hired.  My fellow members of my local community and I paid for that education.  As did, individually, all the local communities surrounding all the other factories pay for the education of those factories’ workers.  Your Federal government had little to do with that, Arne Duncan and his Office for Civil Rights’ “Dear Colleague” letter’s attack on the rights of our students notwithstanding.

Further, “the rest of you” didn’t pay for the police and fire protections of my workers—again, the local community around my factory did, and does, that.  “The rest of you,” and I, do pay for the federal police function that keeps our borders secure, and our citizens along the border area safe.  We’re well aware of how that’s working out.

And if my workers and I were able to keep more of our money, instead of having it confiscated by an overreaching government for current spending (note that: not “paying it forward for the next kid”), I’d be able to improve my factory, develop better products, and hire even more workers (educated by local communities, not “the rest of you,” and kept safe by locally funded and manned police forces, not paid forces for by “the rest of you”).  On top of that, if my workers and I were able to keep more of our money, we would be able to put “a hunk of that” by to “pay forward” to our own kids.  But your kind of government won’t even let us do that.  You’re going to increase the death taxes you seize to 55%—at direct cost to those kids.