I was at the town hall. The room was overflowing. I got to shake Dr. Paul's hand when he came in. He gave perfect answers as usual. I really think people should watch this to get sense of what Ron Paul is about.
Part 1:
Part 2:
DIGG
Sunday, January 6, 2008
Friday, January 4, 2008
Hayek's The Road to Serfdom
The Road to Serfdom by Friedrich Hayek is on my reading list. He won the Nobel Prize in Economics in 1974. From Wikipedia:
Let me submit some examples:Hayek’s central thesis is that all forms of collectivism lead logically and inevitably to tyranny, and he used the Soviet Union and Nazi Germany as examples of countries which had gone down “the road to serfdom” and reached tyranny. Hayek argued that within a centrally planned economic system, the distribution and allocation of all resources and goods would devolve onto a small group, which would be incapable of processing all the information pertinent to the appropriate distribution of the resources and goods at the central planners’ disposal. Disagreement about the practical implementation of any economic plan combined with the inadequacy of the central planners’ resource management would invariably necessitate coercion in order for anything to be achieved. Hayek further argued that the failure of central planning would be perceived by the public as an absence of sufficient power by the state to implement an otherwise good idea. Such a perception would lead the public to vote more power to the state, and would assist the rise to power of a “strong man” perceived to be capable of “getting the job done”. After these developments Hayek argued that a country would be ineluctably driven into outright totalitarianism. For Hayek “the road to serfdom” inadvertently set upon by central planning, with its dismantling of the free market system, ends in the destruction of all individual economic and personal freedom.
Hayek argued that countries such as the Soviet Union and Nazi Germany had already gone down the "road to serfdom", and that various democratic nations are being led down the same road. In The Road to Serfdom he wrote: "The principle that the end justifies the means is in individualist ethics regarded as the denial of all morals. In collectivist ethics it becomes necessarily the supreme rule."
- The government planted the seeds for terrorism by supporting Al Qaeda in the 1980's, maintaining military bases in hundreds of countries, supporting authoritarian regimes in the Middle East, and overthrowing democratically elected governments. When we were attacked, the answer wasn't to stop the behavior which provided a recruiting tool for radical terrorists. Instead, Congress passed the Patriot Act which allowed the government to spy on our own citizens and then gave the executive branch power to launch an aggressive war in Iraq.
- George W. Bush didn't have enough authority to help New Orleans during Katrina. Therefore, we repealed parts of Posse Comitatus Act which now allows the President to use the U.S. Military against the American people if he declares the country is in any type of crisis.
- The U.S. courts couldn't possibly handle processing a couple hundred suspected terrorists although our courts process tens of thousands of cases every year. Therefore, we had to suspend Habeas Corpus.
- Our healthcare system that was created by the government is totally broken. Therefore, we need to give the government more power to control healthcare.
- Our government provided education is terrible. Therefore, instead of adopting a free market approach to education, we need to give our central planners more control over how we educate our children.
- Our government-run FAA and airplane security failed to prevent 9/11. Therefore, we needed to give the government more control over airplane security by creating the TSA and the Department of Homeland Security.
- The Federal Reserve, Fannie Mae, Freddie Mac, misguided incentives in the tax structure, and the SEC-granted credit rating agency triopoly were the main causes of the housing bubble (I will post on this later). Therefore, we need to give these agencies more power in order to remedy the system.
Inflation and Capital Gains Tax
In The Deflation Monster, Wanniski says "Inflation can push real capital-gains tax rates above 100 percent on long-held assets, as the tax shifts from real gains to spurious inflationary increases in valuation." What does he mean by this and how is it possible to pay more than 100% on long-held assets.
Let's take a simple scenario.
Tom buys some asset for $100,000. Let's say the banks are causing inflation of 5% per year and that this asset perfectly retains its value from year to year. In other words, its real fundamental value never changes. It's worth the same to everybody today and 10 years from now. Because of inflation in the money supply, the nominal price of this asset increases every year to account for the inflation. One can make a simple series for this:
So in year 10, the nominal price is $162,889. Tom decides to sell this asset. His real gain is zero because the asset has not appreciated in real terms. It's only appreciated in nominal terms. But taxes are on nominal gains. So Tom owes a tax on a capital gains of $62,889. At the 20% rate (and it used to be much higher), he'll pay $11,026 to the IRS. Tom just paid taxes on a real gain of zero.
Imagine that this asset was Tom's house and Tom wanted to move to a different neighborhood. He would have to buy a smaller house because of the tax on the nominal gain. Tom would need to take this tax consequence into account when making an unrelated decision. This creates an inefficiency. Now in reality, the Federal government realizes this would be unfair so it excludes the first $250,000 of profit from capital gains when it's on a house. But only when it's on a house and only the first $250,000 of profit.
If instead of a house, Tom bought a stock that paid dividends and its appreciation was due soley to nominal inflation, Tom would pay taxes on the nominal gains. He would then lose money on the stock. If after 10 years, Tom thought some other stock was a better investment, he would have to consider the tax consequence of selling the stock to buy the other stock. This makes the capital markets less efficient because the tax consequences can outweigh the gain by allocating capital to the most productive companies.
Now imagine Tom is really a wealth management fund for some wealthy investors. They have owned Exxon-Mobil for many years. They want to invest in some new solar technology because they think that's where the future is at for energy production. Unfortunately, they don't allocate their capital efficiently because of these tax consequences. So the solar company doesn't get as much capital as it could otherwise.
Let's take a simple scenario.
Tom buys some asset for $100,000. Let's say the banks are causing inflation of 5% per year and that this asset perfectly retains its value from year to year. In other words, its real fundamental value never changes. It's worth the same to everybody today and 10 years from now. Because of inflation in the money supply, the nominal price of this asset increases every year to account for the inflation. One can make a simple series for this:
| 0 | $100,000 |
| 1 | $105,000 |
| 2 | $110,250 |
| 3 | $115,763 |
| 4 | $121,551 |
| 5 | $127,628 |
| 6 | $134,010 |
| 7 | $140,710 |
| 8 | $147,746 |
| 9 | $155,133 |
| 10 | $162,889 |
So in year 10, the nominal price is $162,889. Tom decides to sell this asset. His real gain is zero because the asset has not appreciated in real terms. It's only appreciated in nominal terms. But taxes are on nominal gains. So Tom owes a tax on a capital gains of $62,889. At the 20% rate (and it used to be much higher), he'll pay $11,026 to the IRS. Tom just paid taxes on a real gain of zero.
Imagine that this asset was Tom's house and Tom wanted to move to a different neighborhood. He would have to buy a smaller house because of the tax on the nominal gain. Tom would need to take this tax consequence into account when making an unrelated decision. This creates an inefficiency. Now in reality, the Federal government realizes this would be unfair so it excludes the first $250,000 of profit from capital gains when it's on a house. But only when it's on a house and only the first $250,000 of profit.
If instead of a house, Tom bought a stock that paid dividends and its appreciation was due soley to nominal inflation, Tom would pay taxes on the nominal gains. He would then lose money on the stock. If after 10 years, Tom thought some other stock was a better investment, he would have to consider the tax consequence of selling the stock to buy the other stock. This makes the capital markets less efficient because the tax consequences can outweigh the gain by allocating capital to the most productive companies.
Now imagine Tom is really a wealth management fund for some wealthy investors. They have owned Exxon-Mobil for many years. They want to invest in some new solar technology because they think that's where the future is at for energy production. Unfortunately, they don't allocate their capital efficiently because of these tax consequences. So the solar company doesn't get as much capital as it could otherwise.
The Deflation Monster by Jude Wanniski
I discovered this article from 2001. I am still digesting it. I think it will take a couple more careful reads.
Public Schools
I had a really interesting conversation today that gave me some hope for the next generation. Greg, Ben, and I were returning from lunch on the way to our car when we saw a group of students, probably 17 to 19 years old, carrying signs for a non-partisan organization trying to raise awareness about educational issues.
Greg engaged them in a conversation to discuss what should be done to improve education. Initially, they were reluctant to mention any ideas because they said their organization was not proposing any solutions but rather just trying to increase discussion about educational issues. Greg asked them to say what they personally thought independent of their organization.
One of the students said that he thought we needed to improve the public schools because many of them were really bad. Greg asked him how he would improve them and the student replied we could give the really bad ones more money. Greg asked him whether it was a good idea to reward bad schools by giving them more money as opposed to giving the good schools more money to be able to educate more students. This sparked an interesting discussion. These students had assumed as a given that the right way to fix the education system was to provide more resources to the worst schools.
Greg suggested to them to consider a neighborhood with a few restaurants. If one of them was really bad, should we try to fix it by giving it money to improve. They agreed that this wasn't a good idea. Greg suggested that maybe we should close the bad schools. The group then replied that students would have no place to go. Greg asked why couldn't the vice-principal at the really good school became the principal at a new school to replace the bad school. He could hire a new staff and run it with all the lessons learned from the really good school. They liked that idea.
We got into a discussion of how money really isn't the source of the problem. I told them that in Washington, D.C., the Federal government pays $13,000 per student and they have one of the worst education systems in the country. I asked them what they thought if instead, we gave those parents $13,000 vouchers to spend at any school they wanted. I suggested that lots of private schools would pop up all over the place and parents would have a lot of choices of where to send their kids. They totally agreed that this would probably make the education system there much, much better. One of the students said that she could have gone to a really good private prep school if she had been given a $13,000 voucher.
I also asked them whether people in New Hampshire and Manchester should get to decide how they teach their students or whether that should be dictated to them by the government in Washington, D.C. They strongly agreed that it should be done at the state level, but then one student said he thought there should be some federal guidelines. I brought up that No Child Left Behind was just such an example, to which they were opposed.
I think by the end of the conversation, we changed their perspectives. We hopefully made them realize that giving people choice and having the suppliers of a service compete is a much better solution than a government granted monopoly that has little market incentive to do better.
Ben brought up the point afterwards that people think of schools as having feelings and we can't close them because it would hurt the school. Is this really to the benefit of the students? Or is this to the benefit of the teachers and staff who run these schools who are next to impossible to fire under normal circumstances regardless of their performance?
I believe a free market solution for education in this country would dramatically improve our education system. Government granted monopolies are never in the interest of the consumer. We could still have public funding for education but instead let parents and students have a choice of what school to send their kids by giving them vouchers. We have the best colleges and universities in the world. Could this be due to the fact that there is so much competition and choice? Why can't we have competition and choice at all levels of education? We currently have a single-provider system for education. A new model is needed.
Greg engaged them in a conversation to discuss what should be done to improve education. Initially, they were reluctant to mention any ideas because they said their organization was not proposing any solutions but rather just trying to increase discussion about educational issues. Greg asked them to say what they personally thought independent of their organization.
One of the students said that he thought we needed to improve the public schools because many of them were really bad. Greg asked him how he would improve them and the student replied we could give the really bad ones more money. Greg asked him whether it was a good idea to reward bad schools by giving them more money as opposed to giving the good schools more money to be able to educate more students. This sparked an interesting discussion. These students had assumed as a given that the right way to fix the education system was to provide more resources to the worst schools.
Greg suggested to them to consider a neighborhood with a few restaurants. If one of them was really bad, should we try to fix it by giving it money to improve. They agreed that this wasn't a good idea. Greg suggested that maybe we should close the bad schools. The group then replied that students would have no place to go. Greg asked why couldn't the vice-principal at the really good school became the principal at a new school to replace the bad school. He could hire a new staff and run it with all the lessons learned from the really good school. They liked that idea.
We got into a discussion of how money really isn't the source of the problem. I told them that in Washington, D.C., the Federal government pays $13,000 per student and they have one of the worst education systems in the country. I asked them what they thought if instead, we gave those parents $13,000 vouchers to spend at any school they wanted. I suggested that lots of private schools would pop up all over the place and parents would have a lot of choices of where to send their kids. They totally agreed that this would probably make the education system there much, much better. One of the students said that she could have gone to a really good private prep school if she had been given a $13,000 voucher.
I also asked them whether people in New Hampshire and Manchester should get to decide how they teach their students or whether that should be dictated to them by the government in Washington, D.C. They strongly agreed that it should be done at the state level, but then one student said he thought there should be some federal guidelines. I brought up that No Child Left Behind was just such an example, to which they were opposed.
I think by the end of the conversation, we changed their perspectives. We hopefully made them realize that giving people choice and having the suppliers of a service compete is a much better solution than a government granted monopoly that has little market incentive to do better.
Ben brought up the point afterwards that people think of schools as having feelings and we can't close them because it would hurt the school. Is this really to the benefit of the students? Or is this to the benefit of the teachers and staff who run these schools who are next to impossible to fire under normal circumstances regardless of their performance?
I believe a free market solution for education in this country would dramatically improve our education system. Government granted monopolies are never in the interest of the consumer. We could still have public funding for education but instead let parents and students have a choice of what school to send their kids by giving them vouchers. We have the best colleges and universities in the world. Could this be due to the fact that there is so much competition and choice? Why can't we have competition and choice at all levels of education? We currently have a single-provider system for education. A new model is needed.
Thursday, January 3, 2008
Gold, Money, and Price Volatility
I thought this was an interesting blog post from mises.org.
http://blog.mises.org/archives/007612.asp
http://blog.mises.org/archives/007612.asp
Gold, Money, and Price Volatility
Gil Guillory
Murphy's latest response to Frum is excellent. There is one point that he did not meet that merits special attention. Frum says:
Gold is a commodity. Like all commodities, its price is highly volatile. A money fixed to gold must be highly volatile too. Signing up for a true gold currency would be signing up for an unending monetary roller-coaster ride.
However, it is not true that the volatility in the purchasing power of gold-as-it-is-now would be the same as gold-as-money. As Rothbard and Mises have noted, the total demand to hold the money commodity is the sum of the demand for use as a commodity and demand for use as a money. With a return to the gold standard, the demand to hold gold-as-money would increase (right now, this demand is negligible), causing its price in US dollars to increase. The volatility of the use-value component of gold will be swamped by the exchange-value component. No roller coaster there.
With regard to the demand to hold money, Mises pointed out:
Every economic agent is obliged to hold a stock of the common medium of exchange sufficient to cover his probable business and personal requirements. The amount that will be required depends upon individual circumstances. It is influenced both by the custom and habits of the individual and by the organization of the whole social apparatus of production and exchange.This demand to hold is the dog of the monetary system, and the purchasing power of money is the tail it wags. During a recession, the demand to hold money broadly increases because many people forebear from unnecessary expenses. Against a relatively fixed supply of money, this will increase the purchasing power of money, which has the socially desirable effect of increasing the effectiveness of the money held by people in the recession. This is hardly a roller-coaster ride, either.
A roller-coaster ride is this: during a recession, the demand to hold money broadly increases because many people forebear from unnecessary expenses. The government greatly increases the supply of money to "heat up the economy", which decreases the purchasing power of money, thwarting the intentions of people attempting to survive the recession.
More on this here, of course.
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