Tuesday, December 30, 2008
Saturday, December 6, 2008
KopBusters rented a house in Odessa, Texas and began growing two small Christmas trees under a grow light similar to those used for growing marijuana. When faced with a suspected marijuana grow, the police usually use illegal FLIR cameras and/or lie on the search warrant affidavit claiming they have probable cause to raid the house. Instead of conducting a proper investigation which usually leads to no probable cause, the Kops lie on the affidavit claiming a confidential informant saw the plants and/or the police could smell marijuana coming from the suspected house.The trap was set and less than 24 hours later, the Odessa narcotics unit raided the house only to find KopBuster’s attorney waiting under a system of complex gadgetry and spy cameras that streamed online to the KopBuster’s secret mobile office nearby.
Friday, December 5, 2008
It's just that class of people who are into economics, and have this illusion, [who] provide us with these analytics that provide us with the illusion of understanding the world and that I find very dangerous. Because the economic establishment, as a class, has been extremely incompetent in history. It's like medieval medicine. Medieval doctors killed more patients than they saved.. they can't predict better than cab drivers...And I blame this crisis on economsts, financial economists particularly.
Mainstream economists today such as Krugman and Bernanke use macroecomomic theories and build complex mathematical models using “scientific principles” to model the economy. These aren't built on axioms about the fundamenetal nature of human behavior but rather built upon historical data and events. They use the methods of science by measuring all types of indices in the economy such as unemployment and prices and then plug them into their models and formulas to decide how to intervene in the market in order to accomplish some type of policy goal. They look like they know what they are doing because they use the facade of science, but in reality, their economics is pseudo-science and their models are worthless, as we just learned again for the millionth time.
Monday, December 1, 2008
The real market test is not what a guild of self-accredited academic economists write in the tenured safety of their tax-funded ivory towers. It is not what a committee of equally subsidized peers determines is fit for publication in the guild's unread and unreadable academic journals. It is the market outside the insulated halls of ivy that determines what survives and what does not.
The debate goes on. This time, however, it is between two real-world economists. One has a Ph.D. from the University of Chicago. The other has no Ph.D. Neither is in academia. They both sell their services as forecasters. Schiff saw this bust coming and said so on national television in 2006. Laffer responded on-screen, dismissing this prediction as nonsense. The video is here.Schiff said that America would enter a major recession in 2007 or 2008, and that it would be long and deep. Laffer was contemptuous of Schiff's forecast. "I don't know where he is getting this," he said.He was getting it from Mises. He was getting it from Murray Rothbard. In short, he was getting it from Austrian School economics.
The debate between Mises and Fisher, Mises and the Chicago School, and Schiff vs. mainstream economists in 2006 boil down to this: Can we trust the Federal Reserve System? The Austrian School's answer: no. Why not? Because the Federal Reserve System substitutes the judgment of monopolistic central planners for consumers and investors. It substitutes the decisions of people with job tenure and little accountability for the decisions of people who put their own wealth at risk. It substitutes the judgments of non-owners for owners. We find that academic economists, either tenured or seeking tenure, side with Fisher. The textbooks side with the academic economists.You would be wise to side with Mises.
Wednesday, November 26, 2008
Wednesday, November 19, 2008
Tuesday, November 18, 2008
With this in mind, we were fortunate to have a client mail us a book titled America's Great Depression by Murray N. Rothbard. We think it is an absolute must-read, on the scale of Amity Shlaes' The Forgotten Man. In this book, you will learn that the New Deal machinery was established by Herbert Hoover, not FDR, and that the scale of the government incursion into the economy was so farreaching that the multi-year program actually ended up doing more harm than good. What is amazing is the chapter on the Reconstruction Finance Corporation (RFC), which was like the TARP in its efforts to bolster government equity stakes in banks, and therefore, to perpetuate the excess capacity in the system. The RFC provided money to groups from financials to farmers (cotton loans were big) to railroads ("some $264 million were loaned to railroads during the five months of secrecy") to state governments. Sound familiar?This RFC began with government capital of $500mn in 1932. Eventually, that grew nearly eight-fold, which is why we think the current TARP is really TARP1. You read this book and you get a glimpse of Hoover's "war on the stock market, particularly on short-sellers" and the new Federal bankruptcy law of 1932, which served to "weaken the property rights of creditors ... states also joined in the attack on creditors" ... as in most depressions, the property rights of creditors in debts and claims were subjected to frequent attack, in favor of debtors who wished to refuse payment of their obligations with impunity ... many states adopted compulsory debt moratoria in early 1933.And get this, "the banks also received their share of Hoover's ire for their unwillingness to expand in those troubled times". Hoover actually lodged a complaint in the New York Times that "banks have not passed the benefits of these relief measures on to their customers". So, in the end, Hoover (Roosevelt, remember, inherited and expanded on this infrastructure) "and Congress agreed to transform the RFC from a generally defensive agency aiding banks and railroads in debt, to a bold 'positive' institution, making capital loans for new construction".
Monday, November 17, 2008
Wednesday, November 12, 2008
The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a result of problems in financial markets, the economy will likely become increasingly reliant on banking organizations to provide credit formerly provided or facilitated by purchasers of securities. Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole....The agencies will continue to take steps to promote programs that foster financial stability and mitigate procyclical effects of the current market conditions. However, regardless of their participation in particular programs, all banking organizations are expected to adhere to the principles in this statement. We will work with banking organizations to facilitate their active participation in those programs, consistent with safe and sound banking practices, and thus to support their central role in providing credit to support the health of the U.S. economy.
But this reliable support by conservatives for the Republican president confronts what psychologists call “cognitive dissonance,” which is to say that people will not forever live with a massive contradiction between what they do and what they believe. Eventually, the beliefs come around. So it has been for the conservatives who, in the 1990s, blasted Clinton’s big budgets and nation-building and then ended up celebrating far larger budgets and a vaster military empire around the world. The result has been an amazing intellectual bankruptcy on the Right.The culminating event was the financial bailout of the Wall Street plutocrats, which contradicts everything that conservatives allegedly stand for. It was socialistic in every way. It rewarded market failures. It ripped off average families for the sake of billionaires. It was the worst form of Keynesian planning. It was an open conflict of interest, as the ex-CEO of Goldman Sachs funneled vast sums to Goldman Sachs. It had exactly zero chance of helping the economy. In fact, by draining productive private resources necessary for economic recovery, it makes a bad situation worse.And yet, no surprise, conservatives came around. You could check in with the Heritage Foundation or National Review Online and find rousing endorsements of this outrage, complete with pieties: “In normal times, we’ve been against government intervention, but these are not normal times…” And what did they get out of it? Nothing but the satisfaction of knowing that they helped sanitize and baptize what may be the worst piece of legislation in half a century
Wednesday, November 5, 2008
The Moral Hazard of Regulationby Ron PaulSince the bailout bill passed, I have been frequently disturbed to hear "experts" wrongly blaming the free market for our recent economic problems and calling for more regulation. In fact, further regulation can only make things worse.It is important to understand that regulators are not omniscient. It is not feasible for them to anticipate every possible thing that could go wrong with whatever industry or activity they are regulating. They are making their best guesses when formulating rules. It is often difficult for those being regulated to understand the many complex rules they are expected to follow. Very wealthy corporations hire attorneys who may discover a myriad of loopholes to exploit and render the spirit of the regulations null and void. For this reason, heavy regulation favors big business against those small businesses who cannot afford high-priced attorneys.The other problem is the trust that people blindly put in regulations, and the moral hazard this creates. Too many people trust government regulators so completely that they abdicate their own common sense to these government bureaucrats. They trust that if something violates no law, it must be safe. How many scams have "It's perfectly legal" as a hypnotic selling point, luring in the gullible? Many people did not understand the financial house of cards that are derivatives, but since they were legal and promised a great return, people invested. It is much the same in any area rife with government involvement. Many feel that just because their children are getting good grades at a government school, they are getting a good education. After all, they are passing the government-mandated litmus test. But, this does not guarantee educational excellence. Neither is it always the case that a child who does NOT achieve good marks in school is going to be unsuccessful in life. Is your drinking water safe, just because the government says it is? Is the internet going to magically become safer for your children if the government approves regulations on it? I would caution any parent against believing this would be the case. Nothing should take the place of your own common sense and due diligence.These principles explain why the free market works so much better than a centrally planned economy. With central planning, everything shifts from one's own judgment about safety, wisdom and relative benefits of a behavior, to the discretion of government bureaucrats. The question then becomes "what can I get away with," and there will always be advantages for those who can afford lawyers to find the loopholes. The result then is that bad behavior, that would quickly fail under the free market, is propped up, protected and perpetuated, and sometimes good behavior is actually discouraged.Regulation can actually benefit big business and corporate greed, while simultaneously killing small businesses that are the backbone of our now faltering economy. This is why I get so upset every time someone claims regulation can resolve the crisis that we are in. Rather, it will only exacerbate it.
Friday, October 31, 2008
In this morning's report on personal income and spending, word came that the savings rate (after-tax income less spending) rose from 0.8 percent in August to 1.3 percent in September.
Thursday, October 30, 2008
On my way to lunch recently, I passed a homeless guy with a sign that read "Vote Obama; I need the money." I laughed. In a restaurant my server had on an "Obama 08" tie. Again I laughed. Just imagine the coincidence. When the bill came, I decided not to tip the server and explained to him that I was exploring the Barack-Obama-redistribution-of-wealth concept. He stood there in disbelief while I told him that I was going to redistribute his tip to someone who I deemed more in need—the homeless guy outside. The server angrily stormed from my sight. I went outside, gave the homeless guy $10 and told him to thank the server inside as I've decided he could use the money more. The homeless guy was grateful. At the end of my rather unscientific redistribution experiment, I realized the homeless guy was grateful for the money he did not earn, but the waiter was pretty angry that I gave away the money he did earn even though the actual recipient deserved money more. I guess redistribution of wealth is an easier thing to swallow in concept than in practical application.—A. Hart, Forest Park
Tuesday, October 28, 2008
An impatient White House served notice Tuesday on banks and other financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans."What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said.Though there are limits on how much Washington can pressure banks, she noted that banks are regulated by the federal government.
Monday, October 27, 2008
In short, the true crux of deflation is that it does not hide the redistribution going hand in hand with changes in the quantity of money. It entails visible misery for many people, to the benefit of equally visible winners. This starkly contrasts with inflation, which creates anonymous winners at the expense of anonymous losers. Both deflation and inflation are, from the point of view we have so far espoused, zero-sum games. But inflation is a secret rip-off and thus the perfect vehicle for the exploitation of a population through its (false) elites, whereas deflation means open redistribution through bankruptcy according to the law.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.
Tuesday, October 21, 2008
Political Rhetoric: An Obama campaign ad says: “Today women work to help support their families but are paid just 77 cents for every $1 a man makes. It’s just one more thing John McCain doesn’t get about our economy.”
1. Obama pays his own female Senate staffers, on average, only 78% of what he pays male staffers (see top chart above), and females make up 53% of Obama's staff.
2. McCain pays female staffers 101% of what he pays men (see bottom chart above), and females made 62% of McCain's staff.
3. Women occupy seven of the top 10 highest-paid positions on McCain’s staff, and five of the top 10 highest-paid positions on Obama’s staff.4. Women on McCain’s staff earn 24% more on average than women on Obama’s Senate staff.
Monday, October 20, 2008
A source of mild entertainment amid the financial carnage has been watching libertarians scurrying to explain how the global financial crisis is the result of too much government intervention rather than too little. One line of argument casts as villain the Community Reinvestment Act, which prevents banks from "redlining" minority neighborhoods as not creditworthy. Another theory blames Fannie Mae and Freddie Mac for causing the trouble by subsidizing and securitizing mortgages with an implicit government guarantee. An alternative thesis is that past bailouts encouraged investors to behave recklessly in anticipation of a taxpayer rescue.
Thursday, October 16, 2008
Thursday, October 2, 2008
Mr. Levine and his client were prisoners in California's Lompoc Federal Correctional Complex. Like other federal inmates around the country, they found a can of mackerel -- the "mack" in prison lingo -- was the standard currency."It's the coin of the realm," says Mark Bailey, who paid Mr. Levine in fish. Mr. Bailey was serving a two-year tax-fraud sentence in connection with a chain of strip clubs he owned. Mr. Levine was serving a nine-year term for drug dealing. Mr. Levine says he used his macks to get his beard trimmed, his clothes pressed and his shoes shined by other prisoners. "A haircut is two macks," he says, as an expected tip for inmates who work in the prison barber shop.There's been a mackerel economy in federal prisons since about 2004, former inmates and some prison consultants say. That's when federal prisons prohibited smoking and, by default, the cigarette pack, which was the earlier gold standard.Prisoners need a proxy for the dollar because they're not allowed to possess cash. Money they get from prison jobs (which pay a maximum of 40 cents an hour, according to the Federal Bureau of Prisons) or family members goes into commissary accounts that let them buy things such as food and toiletries. After the smokes disappeared, inmates turned to other items on the commissary menu to use as currency.
Friday, September 19, 2008
Wednesday, August 20, 2008
Tuesday, August 19, 2008
The Russians now say ah ha, "What you're doing is nothing compared to what we want to do. We want to go into Georgia. Because you say there's terrorists and that the Iraqis are possible terrorists, that's why we want to go into Georgia and we want you to approve it." And that's why maybe they're looking to give in a little bit to us if we're willing to ignore what they do in Georgia.
Monday, August 18, 2008
Friday, August 8, 2008
Ron Paul in the House Financial Services Committee, September 10, 2003
Mr. Chairman, thank you for holding this hearing on the Treasury Department’s views regarding government sponsored enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee.
I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.
One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.
The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.
The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.
Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.
Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.
Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.
No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.
Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today’s hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.
Sunday, August 3, 2008
The "Consumer Economy" was Always a Mockery
But, last week, the U.S. Senate bent down and pressed its large mouth onto those gaping traps of the mortgage twins - gurgling into them a corrupt breath of life. Since the two hold one out of every two mortgages in the nation, in effect, Congress is nationalizing the U.S. housing stock itself. Henceforth, citizens will pay not only their taxes to the government, but their mortgage payments too.
The cartoon capitalists did it all backwards; they are supposed to exploit the workers, not be exploited by them. But while consumers and investors were going nowhere, corporate managers and Wall Street hustlers were getting rich. The two Bozos running Fannie and Freddie, for example, pocketed about $32 million between them last year - during a period in which the companies lost almost $5.2 billion - not to mention the losses to shareholders. And on Wall Street, managers paid out $250 billion in bonuses in the 4 years leading up to the credit crunch. The firms declared a profit and paid bonuses when the bets were made; they didn't wait to see how they turned out. Thus did the big banks and big brokers become capitalists without capital, dependent on the gullibility of investors to keep them in business. And when investors began to wise up, they turned to the public for capital support.
What kind of scam is this? It may look like capitalism from a distance. But this is not real capitalism; this is cartoon capitalism - run by clowns, who sell freak investments to chump investors, and encourage the lumpen householder to ruin himself.
U.S. Economy is Still Growing but GDP Growth Rates Are Mostly Fraud
There are only so many hours in the day...and only so many resources to work with. The real question is what is done with them. If they are used to produce things, to build factories, and to add to the nation's capital, people become wealthier. If they are squandered - using up capital instead of adding to it - people become poorer. GDP figures don't tell you want is really going on. But when an economy becomes too dependent on credit and consumer spending, GDP figures actually become perverse; they measure the rate at which the nation impoverishes itself.
Saturday, August 2, 2008
Here is a good rebuttal of McCulley's view. It is in line with the Austrian school of thought.
Personally, I don't worry as much as I used to about this stuff. When I initially learned about the Austrians, I worried so much about all these government policies that were obviously wrong. Bad policy created terrible asset bubbles and then prescribed the wrong medicine. Reading authors such as Hayek, Hazlitt, and Rothbard was a great revelation for me. I felt compelled to campaign for Ron Paul, the only person in Congress who truly understands these issues. We had some successes along the way, but we weren't able to convince the American people. They have not yet woken up and they are such easy victims for people like Bernanke and Paulson who are more than glad to privatize the profits and socialize the losses under the guise of saving the financial system. Just look at Fannie Mae and Freddie Mac. One cannot fathom a better bailout -- while the Treasury sends them money to keep them solvent through the front door, they can continue paying dividends to their investors out the backdoor. Well, the Democrats and Republicans just love them too much. No surprise though -- they donate handsomely to their campaigns and the politicans can support them under the cover of trying to keep housing affordable. Right, housing was so affordable when prices were increasing exponentially. Well, maybe after another 30% to 40% drop, it will finally become affordable. Of course Fannie and Freddie will be doing everything in their powers to stop that.
After the Paul campaign started winding down for me in January, I realized how much all this economic knowledge was useful for investing. This influenced my decision to short and buy Jan 09 PUTs (bets that the price will drop) on Fannie and Freddie in Febuary. I later closed most of these positions just before the bailout was announced. During this period, Fannie's stock went from $28.70 to $8.55 and Freddie from $26.61 to $6.83.
The principles of Austrian economics predicted how this asset bubble would play out (the asset prices would eventually drop and the most leveraged participants would become insolvent) and the principles of Keynesian economics predicted what the Federal government would do about it (bailouts for the GSEs and the banks). Anybody who says that Austrian economics isn't practical surely didn't consider its application for investing. Of course timing is also critical. Austrian economics predicts what will happen but it doesn't make claims about the timeline.
I'd much prefer that we had sound money based on gold and I could invest in productive companies that create value for the economy and provide dividends to their investors. But since this government has taken that option away from me and continues to erode the value of the dollar through inflation, my only alternative is to make money by exploiting these bad policies. My one big fear though is that the entire financial market self-destructs and the dollar crashes with it. I think there's around a 10% chance of that happening. In that event, we're all going to be poor. In that scenario, I just hope I have enough gold, water, and food to weather that storm and come out the other side with enough to invest in the new economy that emerges from the ashes.
Friday, August 1, 2008
A national bubble is unlikely because the U.S. real estate market is composed of individual regions with different pricing trends, making a collapse that damages the overall economy unlikely, Greenspan said. Home purchases and sales also have high transaction costs, making it hard to speculate, and most people buy homes to live in, he said.
There is ``considerable unlikelihood of a major decline'' in prices because that's ``very rare'' in the U.S., Greenspan said.
``Even if there are declines in prices, the significant run- up to date has so increased equity in homes that only those who have purchased just before prices literally go down are going to have problems,'' he said.
Greenspan in 2008:
The former chairman of the Federal Reserve, Alan Greenspan, said falling home prices in America are "nowhere near the bottom" and the resulting market turmoil isn't showing signs of abating.It's amazing that anybody listens to this fool. His policies of bailing out the banks after the Internet bubble crash were the single biggest contributor to creating the housing bubble. It's not just Greenspan that is at fault though. The entire system is broken and always will be as long as a private banking cartel sets the cost of money (interest rates) instead of letting the free market do it. Things can only get worse from here with Bernanke in charge who was a very influential figure in the banking system during the times of these disastrous policies.
Sunday, July 20, 2008
It's not that I disagree entirely with you but you build your satire around the assumption of the following extremes: the "rich" pay for everything - by rich do you mean MD rich ($300k / year) or CEO ($40 million annual income) rich? In your model is there a middle class whose collective resources benefit people of similar status?
I wasn't trying to imply that the rich pay for everything, but I could understand how somebody might draw that conclusion. With a satirical post, it's not always obvious which parts are satire and which parts are direct. What I was trying to suggest is that I think there are lot of people on the left who think that it's possible to pay for everything by taxing the rich. Their logic is that if the government needs more money to fund a program, it's only a matter of raising taxes on the wealthiest Americans. I believe this is fundamentally flawed and it has to do with the nature of money, wealth, and what it means to pay for something.
In terms of direct taxes, there are lots of statistics. The National Center of Policy Analysis has an article saying the wealthiest 1% pay 35% of the taxes. There are lots of studies about that, but I don't think they tell the full story. As I said, I am more interested in getting to the deeper nature of this question.
So let's take the most extreme example: people like Warren Buffet -- the wealthiest of the wealthiest. It should be possible to pay for many government programs by taxing these people more. The reality though is that even if we doubled the taxes paid by billionaires like Warren Buffet, it would likely have almost zero impact on their lifestyles or their consumption. Warren Buffet lives an extremely simple life. According to Wikipedia, "He lives in the same house in the central Dundee neighborhood of Omaha that he bought in 1958 for $31,500, today valued at around $700,000." I heard his typical dinner is a cheeseburger from the local diner.
So what does it mean to tax Buffet more? It pretty much means that we'll take capital that Buffet would invest in productive companies and instead give it to the government. As history has shown, governments are terribly inefficient at allocating capital. This is why socialism and communism don't lead to productive economies. Most of the money government takes in is consumed. Some of it may be used to build infrastructure like roads and bridges, but very little of it will be used to create the next generation of great companies that will help make the world wealthier. There is a good reason why companies like Microsoft, Google, Intel, and Apple are all products of the private sector. Most of the money the government takes in goes to the military or to really inefficient capital allocation like farm subsidies. Some of the money is redistributive. It may help feed some poor people today, but for the most part, it won't be a real investment in their future. Little of it will be used for productive capital that will provide them jobs in the future.
What I am trying to say is that the wealthiest wouldn't really be paying the cost of these taxes -- everybody would. There was some level of taxation that would have prevented companies like Google or Microsoft from coming into existence. And everybody would be a lot worse off without those companies. There are some companies that would currently exist if more capital had been invested by the private sector in things people want (longer lives, better education for their children, better healthcare) than those things politicians want (a military empire, corporate welfare for their cronies, lucrative lobbyist jobs after they retire, etc.,). So somewhere out there are a handful of people that aren't billionaires because they didn't get to create those companies, but that isn't the real cost to society. The people who paid those taxes were average Americans who now won't get the benefit of those companies that never were created. As Henry Hazlitt wrote in Economics in One Lesson, "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."
Now Buffet is the extreme example, but I believe the same is true for the majority of wealthy people whether it be the "MD rich" or the "CEO rich". Certainly, many of these people spend a lot more on consumption and lavish lifestyles than the average person. But I think the majority of these people are saving the money and investing in it like Buffet is. Many people may think of the worst excesses associated with being wealthy and that is what is often reported on television. But that is the outlier case (though the most entertaining for sure). For the most part, wealth is being invested in future production that will help improve the lives of everybody in the future. If you tax these people a little bit more, it will mostly have an unnoticeable impact on their lifestyle but have a large impact on how capital is allocated. If you tax them excessively, it can destroy the economy altogether because it takes the incentive out of making money. If my tax rate were 90% for example, there would have been very little benefit to me working hard as a software engineer. I would have hung out at the beach instead of integrating chat into Gmail. And there probably wouldn't have even been a Google or a Gmail at all because the other people I work with would have probably have been at the beach with me.
I hope I answered the question of who really pays the taxes.
We'll have the city of San Francisco open up a chain of restaurants. We'll make them completely free and the city will pay for them with taxes. We'll tax wealthy people the most so that the people without much money won't have to pay any taxes for this service. Since it's free, it will have the additional benefit of causing most of the profit-seeking restaurants in the city to close down. Even though they may sell better food, it's hard to compete with something that is free to the customer. But since there's little competition, the food quality in our public restaurants may suffer or vary too much from neighborhood to neighborhood. The people in the wealthier neighborhoods may try to help their restaurants get better ingredients, but that wouldn't be fair to people in lower income neighborhoods. To solve this, we'll create a central bureaucracy that will set food standards across the entire city. Although the overhead of this bureaucracy will cost about 20% of the total cost of the entire operation, it'll be worth it because we'll have uniform standards set by professionals who know what is best for us. And it'll be funded for by taxes from wealthy people who already have too much money.
Some super wealthy people may choose to go to private restaurants, but it will be a tiny minority because few people can afford to pay taxes once for their public restaurants and then pay a second fee to private establishments. Those establishments will be very expensive because they will only cater to the wealthiest and the tiny demand will severely limit competition. Although our leaders will all dine at these elite establishments, they will stand behind the quality and cost of the public restaurants.
Some other people may choose to pay for raw ingredients and eat at home, but we'll demonize those home-cookers as being anti-social and weird. We'll wonder why they don't want to eat with the rest of us? Is our food not good enough for them? It would be too dangerous to let this trend catch on. But it'll be okay -- eventually one of them will screw up and that's when we'll pounce. Perhaps, one of them will get food poisoning and we'll feign outrage. Although the incidence rate of food poisoning is the same at both public and home kitchens, the general population knows that statistics lie. We'll say we must protect these home-cookers from poisoning themselves and we'll demand they change their ways and eat like the rest of us.
Hopefully, this model will become so successful that we'll replicate it to the state level. And then other states will copy it. To ensure that things are fair from state to state, we'll pass "No eater left behind" legislation to ensure consistent standards. We'll have to raise more taxes though to fund the Department of Gastronomy.
Of course, no system is perfect. Problems may arise from time to time. For example, the workers at these state-run monopolies may realize they have a lot more leverage than they would in a free marker. Where would people eat if they went on strike? They will negotiate lucrative contracts that guarantee it's virtually impossible to get fired and everybody will get a fair salary based on seniority instead of based on the quality of their work. After all, how would it be fair to pay Michelle more than David just because Michelle works longer hours.
Some people though may not like the food they are getting. They will demand better from their state government. Some forward-looking free market thinkers may realize that we should give these eaters more choices. We'll allow a few charter restaurants to be created. They will receive funds from the state and the eaters will get vouchers to dine at these quasi-private establishments. These charter restaurants will be loathed by the public restaurants. The employees of the public restaurants will not like the employment practices at the charter restaurants such as firing waiters who are under-performing or giving some cooks bonuses because their food is better. They will say that these charter restaurants don't meet the same standards as the public ones and demand that this be fixed to protect eaters. The charter restaurants will be forced to comply with the thousands of pages of regulations created by the public food bureaucracy, but it will be very difficult for them because they don't have their own giant bureaucracy for ensuring compliance. Some charter restaurants will stay around but only enough to placate the most unhappy eaters and not so many that the overall system is destabilized.
Now, isn't this so much better than the current model of having those profit-seeking restaurants of varying quality all over the city. Some of them are mom and pop places that go out of business when their customers don't like their food. How unjust is that!
There are those of you who may think this is a pretty silly idea. But if it works so well for primary and secondary education, why not replicate it to other areas. Hopefully, I've convinced the naysayers.
Thursday, July 17, 2008
In a stunning development which fell with the silence of a feather yesterday, nine Republicans broke with their iron-fisted party to put country first, and voted to send Rep. Dennis Kucinich's article of impeachment HR 1345 to the Judiciary, where Chairman John Conyers will hold a hearings on abuses of power by the Bush administration, according to the Congressional Quaterly's CQToday. The final vote was: Yea 238 - Nay 180.
The Nine Republicans are: Congressman Kevin Brady (TX) Congressman Wayne Gilchrest (MD) Congressman Walter B. Jones (NC) Congressman Don Manzullo (IL) Congressman Tim Murphy (PA) Congressman Ron Paul (TX) Congressman Dave Reichert (WA) Congressman Christopher Shays (CT) Congressman Mike Turner (OH)
One of the Republicans, Walter Jones, represents Camp LeJeune in North Carolina, one of the largest Marine bases in the country, and one which has borne heavily the sacrifice of the Iraq War.
I am glad that Ron Paul voted for this. He is a true patriot.
Wednesday, July 16, 2008
Saturday, July 5, 2008
There is a great debate among many economists that I read on whether we're experiencing inflation (the creation of money and credit) or deflation (the destruction of money and credit). And this is just among those who would consider themselves followers of the Austrian School of Economics. In one corner, there are people like Mike Sheldock of Mish's Global Economics Trend Analysis that argue we're seeing deflation. He points to the destruction of credit in the financial markets, the fall in housing prices, the downward pressure in wages of American workers, and the falling stock market. On the other side are people like Peter Schiff of Euro Pacific Capital who believe the Fed is inflating. He points to the rise in gold and commodity prices, the increases in M3 and other monetary measures, and the fall of the dollar. It is pretty interesting how economists that have very similar views on the market, the government, and central banks could disagree so dramatically on such a basic issue.
My opinion is that they are both partially right. As I pointed out in my previous post, we've seen global savings double in a very short period of time. This was due to massive inflation by central banks across the world. The Fed kept interest rates far below the market rate for years creating enormous amounts of credit and liquidity. The Bank of Japan had the most accomodating monetary policy imaginable with 0% interest rates. The Chinese and Middle Eastern countries were accomplices to the Federal Reserve with their dollar pegs that resulted in them inflating to keep up with the United States. This led to global savings doubling in such a short time. This wasn't simply real savings resulting in people deferring consumption in order to save for future consumption (what individuals do when they decide to save for a house instead of spending it on the movies). This was massive amounts of new money being created and lent out.
The reason this worked for so long is because we had massive productivity increases with the advent of computers, the Internet, and the growth in the BRIC economies. This helped mask the inflation. All these productivity gains should have caused prices to drop dramatically, but central banks fear falling prices and governments love inflation because it allows politicans to finance their pet projects. So we had years of massive inflation, but prices of most things we consume rose only modestly as the increases caused by the new money was somewhat offset by productivity gains and low wages of foreign workers. The purchasing power of savers should have rose dramatically, but instead it barely kept up.
But all that new money had to go somewhere and somewhere it went. Fixed income savings of $70T wants to get a good return. And getting a 1% return on treasuries when even the CPI is higher isn't a successful recipe for pension funds and insurance companies. All that money went into the biggest credit bubble the world has ever seen. And there's been plenty of good articles and blogs about this subject. I highly recommend This American Life's episode titled The Giant Pool of Money.
So now the housing bubble has popped. Billions if not trillions of dollars of credit are being destroyed. When somebody defaults on their house and the bank can only sell it for 60% of the mortgage, that other 40% is just gone. That's true deflation. That is destruction of money and credit. The money came into existence out of thin air when central banks and the financial system created it and when that loss is written off, it just goes back into thin air. This is the deflation Mish is referring to. But what is the inflation Peter Schiff is referring to? Ah, this is where it gets connected back to rising oil and commodity prices. While there may be some credit deflation happening, most of that $70T is still in existence and it's trying to find a new place to go to find a return. The interest rates on treasuries are very low partly because the Fed has dropped the fed funds rate to 2%. That is a negative real return on money when compared to even the understated CPI. If these investments can't get a decent return on bonds, some of it is going to go to other places like precious metals and commodities.
But this is still only part of the story. The United States created so many dollars in the past and the world just doesn't need that many more. China and the countries that supply us with oil receive enormous numbers of dollars, way more than they need to buy stuff that we produce that they want (i.e. the trade deficit). And because the dollar has been the world's reserve currency for decades, all the wealthy countries in the world have already accumulated huge numbers of dollars. And they are beginning to wonder why they should keep accumulating this paper. And basic supply and demand says that if the demand for dollars is decreasing, the prices of things denominated in dollars will rise. And they are. The entire world wants more oil and food. They want fewer dollars.
So that's pretty much the story and we can expect it to continue for a while. Even if there's lots of deflation happening in the credit markets, that deflation is small compared to what will appear to us like inflation if all the countries that have accumulated trillions of dollars start sending them back to us to purchase real goods. The purchasing power of the dollar will keep going down until the imbalances are fixed. And then it may overshoot because markets often overshoot. Politicans will predictibly blame "evil" speculators and the "dangerous" free market. Funny that they didn't blame speculators and the free market when housing prices were rising. At any rate, the blame lies fully with the government. None of this could ever have happened under a gold standard.