Tag Archives: political economy

Another Unintended Consequence

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Here’s a pending “revenue saving” failure in which both parties are on track to be complicit.  President Barack Obama’s latest budget guess includes a measure purported to

improve the financial stability of Medicare by reducing taxpayer subsidies for retirees who can afford to pay a bigger share of costs. Congressional Republicans agree with the president on this one, making it highly likely the idea will become law if there’s a budget deal this year. … Obama’s budget would change Medicare’s upper-income premiums in several ways.  First, it would raise the monthly amounts for those currently paying.  Then, the plan would create five new income brackets to squeeze more revenue from the top tiers of retirees.

We’ll leave aside the dishonesty of pulling the rug out from under current retirees by changing the rules on them after they’re irrevocably committed to a retirement expense and income stream based on the original rules.  Instead, the unintended consequence, illustrated by the example of Sheila Pugach:

[S]he’s being penalized for prudence, dinged for saving diligently.

It was the government, she says, that pushed her into a higher income bracket where she’d have to pay additional Medicare premiums.

IRS rules require people age 70-and-a-half and older to make regular minimum withdrawals from tax-deferred retirement nest eggs like 401(k)s.  That was enough to nudge her over Medicare’s line.

“We were good soldiers when we were young,” said Pugach….  “I was afraid of not having money for retirement, and I put in as much as I could.”

And now she gets to pay even more money to Uncle Sugar as her reward for her honoring her duty to herself and to her family.  Were this nonsense current law, Pugach would pay roughly $168/mo for outpatient coverage under Medicare Part B instead of her present $147/mo—a jump of more than $250 per year.

There are a lot of alternative uses for that kind of money for a person living on a fixed income and little to no job prospect.  Oh, wait—Pugach is an “upper income” retiree.  Well, we know Obama’s reaction to that, don’t we?

I do think at a certain point you’ve saved enough money.

Germany and Eurobonds

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George Soros says that Germany must either support Eurobonds or she must leave the euro.

Given this choice, Germany should leave the eurozone.  They’ll be far better off.

Soros began his op-ed with a false premise:

The euro crisis has already transformed the European Union from a voluntary association of equal states into a creditor-debtor relationship from which there is no easy escape.

The nations of Europe were never equal states, though, and a common currency cannot make them so.  All a common currency can do is facilitate trade—which is no mean thing, but equality it cannot create.  Proceeding from a false premise, the rest of his argument has no meaning, but let’s look at some of it, anyway.

Soros thought he had identified the problem underlying the current crisis thusly [emphasis added, italics in the original]:

By creating an independent central bank, member countries have become indebted in a currency that they do not control.   At first both the authorities and market participants treated all government bonds as if they were riskless, creating a perverse incentive for banks to load up on the weaker bonds.  When the Greek crisis raised the specter of default….  [D]ebtors were treated as if they were solely responsible for their misfortunes and the structural defects of the euro remained uncorrected.

However, these questions are separate from each other.  The one is true, regardless of Soros’ negative attitude.  No one stuck a gun in any national ear and forced that country’s government into their profligate, irresponsible spending and borrowing ways, no more than, say US states—or States under the Articles of Confederation—have been forced to borrow excessively in currencies [sic] which they do not and did not control.

Moreover, the common currency did, indeed, create those perverse incentives, but it did so by pretending that the member countries actually were the equals of each other—hence the perversity: those nations were not, and are not, equal in the relevant context, in the context of their credit worthiness.  Given that inequality, the interest rates demanded by the market were widely divergent, and of course market participants loaded up on the higher-return debt: the common currency created an unsatisfiable belief that repayment by all nations actually was equally assured.

Separately, the structural defects do, indeed, remain uncorrected.

Soros then offered his solution:

If countries that abide by the EU’s new Fiscal Compact were allowed but not required to convert their entire stock of government debt into eurobonds, the positive impact would be little short of miraculous.  The danger of default would disappear, as would risk premiums.  Banks’ balance sheets would receive an immediate boost as would the heavily indebted countries’ budgets.  …  Most of the seemingly intractable problems would vanish into thin air.

No.  A miraculous disaster is all that would result.  There is no moral—or economic—reason for the taxpayers of one country to be required to indemnify the citizens of another country for that second country’s spendthrift ways—ways that those citizens actively support with their elections.  Instead, lacking incentive to correct their behavior, they simply would drag down the responsible with them.

Also, a mandatory eurobond does nothing more than substitute a common debt instrument for a common currency, with the same built-in failure: it will not make equals out of unequal nations.

Soros went on:

If a member country ran up additional debts [in his eurobond régime] it could borrow only in its own name.

And

A tighter Fiscal Compact would practically eliminate the risk of default.

The borrowing restriction, though, is supposedly the present case—and certain nations still overborrowed.  His view of the Fiscal Compact shows a breathtaking misunderstanding by so successful investor.  If there’s no risk of default, there’s no incentive to behave responsibly, no danger to borrowing excessively, at least to the borrowing nation.

He also got into a German departure from the euro.

If a referendum were held today, the supporters of a German exit would win hands down.   But…[t]hey would discover that the cost to Germany of authorizing eurobonds has been greatly exaggerated, and the cost of leaving the euro understated.

No.  The cost of participating in eurobonds has not at all been exaggerated: there is no reason at all for German taxpayers to be held liable for another nation’s fiscal irresponsibility when those German taxpayers, in Soros’ words, do not control that nation’s behavior.  The existence of such a risk means that the cost has not at all been exaggerated.

Germany would be the better off for departing the euro, if its only alternative is to accept responsibility for a share of eurobonds that are used to bail out the irresponsible without the structural changes—at a national level—that are necessary to correct the nation’s problems.  Especially since those necessary structural changes both are necessary in their own right, and their execution would eliminate the need for a common debt instrument.

In the end, as described in the first link above, the eurozone is itself founded on a false premise, and it would better function as a collection of smaller comities that honored the diversity of Europe.

“I Do Think at a Certain Point You’ve Saved Enough Money”

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Here we go, again.

President Barack Obama’s latest guess at a budget looks to cap Americans’ retirement accounts at roughly $3.4 million (never mind that what seems like a fairly substantial amount of money will shrink to insignificance in the coming Bernanke inflation).

On top of that, Obama wants to “return the estate tax to the parameters in place in 2009….  That move would drop the per-person exemption to $3.5 million (remarkably close to that retirement funding cap) from the present $5.25 million and increase the top tax rate on a deceased’s estate to 45% from 40%.

According to Obama, it isn’t really your money, and Big Government Knows Better what to do with it than you do, anyway.

In Which Die Tageszeitung Misses Badly

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Other, better writers have already eulogized the passing of Margaret Thatcher, Prime Minister of the United Kingdom, Baroness of Kesteven, and LG, OM, PC, FRS.  As happens with all great men and women, she has come in for no small amount of criticism on the occasion of her passing, some of it simply, puerilely, shameful.

Other criticisms, though, demonstrate a broad misunderstanding of the lady’s accomplishments, the good she did for the UK and for the world.  Die Tageszeitung (The Daily Newspaper) is one such that badly misses.  This newspaper demonstrates its left-wing (the liberal Spiegel International Online‘s characterization, not mine) cred with these remarks, and I cannot let them go unanswered, even at this late date.

Very few people get a political ideology named after them.  Thatcherism stands for deregulation, privatization and the destruction of the welfare state, as well as of a sense of community.  No one divided British society as much as former Prime Minister Margaret Thatcher.  She is responsible for the destruction of the trade unions and the ruin of the public sector, and especially of the National Health Service.

Actually, they got the first part of this right.  But then they talk about her being the cause of the reduction of union power and of the public sector as though these were bad things.  Britain’s unionism and its then public sector were at the heart of British economic malaise and symptomatic of the nation’s retreat from the world stage—and of Britain’s willingness to lie prostrate in the face of Soviet expansionism, hoping to be passed by, unnoticed.

The failures, the rate death through negligence of children, pensioners, and ages in between while in the tender mercies of the NHS is legendary.  Thatcher’s attempts to rein in this travesty did not achieve enough, unfortunately; although it wasn’t, as DT backhandedly notes, for her lack of effort.

Thatcher got away with her authoritarian leadership style for a long time.  She publicly snubbed difficult colleagues, or just sacked them.  During her time in office she used up more than 100 ministers and surrounded herself with yes-men.  The hope that she, as the first female leader of a major nation, would fan a feminist wind into politics went unfulfilled.  She was never interested in the women’s movement, and only one women made it into her cabinet during her long tenure.

If you can’t effectively attack Thatcher’s policies, attack her person.  And demonstrate a lack of understanding of leadership, and of what it is to be a “yes-man,” to boot.  If a subordinate is being…insubordinate…he should be terminated.  Dissension and debate are required while decisions are being worked out, but refusing to get fully behind a decision once taken is inexcusable.

And as for DT‘s feminist claptrap….  Thatcher was “never interested in the women’s movement” because she was the embodiment of everything that “movement” claims to stand for.  She was a Briton and a PM who happened to be a woman.

It’s hard to imagine greater success.

Carbon Tax?

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Ex-Secretary of Labor, State, and Treasury George Schultz and Economics Professor Gary Becker say we should have one.  They even insist that it be revenue neutral.

The problem is, though, that they’re arguing from two false premises, and it’s unfortunate that two such well-educated men should be so caught up in drama rather than fact.

The first false premise is that any tax change (as the imposition of a carbon tax would be) must be revenue neutral.  This may, in fact, be needful for the politics surrounding imposing a new tax (or cutting old ones), but there’s no rational reason for revenue neutrality.  The economic necessity, given our exploding deficit (though President Barack Obama says his budget shrinks it, and, sure, he is an honorable man) and our even more explosive national debt, demands a reduction in spending with its associated reduction in borrowing.  Taxes need not be increased under any nearby circumstances, nor need the imposition of a new tax be “paid for” with an equal increase in spending or reduction in tax somewhere else.  With spending coming down to eliminate our deficit and further, taxes overall can be cut, too.

The second false premise is that carbon, or carbon dioxide, is a pollutant, the blatherings of the political bureaucrats at the EPA notwithstanding.  The climate facts here are that CO2—the primary product of, say, Schultz’ and Becker’s energy companies—is a lagging, a confirmatory, indicator.  The climate record demonstrates that CO2 increases in Earth’s atmosphere lags climate warming on a global scale by some hundreds of years.  Since CO2 “emissions” are primarily from plant and animal respiration—even adding in the output of those energy plants—that lag following planetary warming comes from increased plant and animal life on the warmer planet.  It’s a confirmation of the increasing health of the planet.  That’s not much of a pollutant.

We don’t need a carbon tax, though.  Come to that, we don’t need any tax at the levels at which they’re charged today.