I have seen a couple of articles recently where supporters of Mitt Romney's economic plan have argued that the Romney plan follows President Reagan's plan for dealing with the recession in 1981-82, and that that is a good thing. (See side comment in footnote)
The articles generally compare that 1981-82 recession with the current recession, throw in some similar arguments how the Bush tax cuts last decade were great for the economy and conclude the Romney plan is the cure for our economic woes.
To me these comparisons are either woefully ignorant or a cynical effort to sell the Romney plan to get their guy elected regardless of the consequences.
1. They seem to be either unaware, or unwilling to face the fact the two recessions were caused by completely different events. The 1981-82 recession, which was pretty mild, followed a decade long period of high inflation as the Government tried to inflate away the deficit from the Viet-Nam war rather than imposing taxes to pay the cost of the war. The current recession was caused by a private sector meltdown and the continuing malaise in the economy is rooted in deep seated problems in the private sector.
2. The article assumes if you put more money in the pocket of rich folks, they will create jobs. It ignores the fact big corporations have been making record profits, and stockpiling money for years. There is no shortage of investment capital, the shortage is on the demand side of the equation - there are few opportunities for investment because ordinary folks don't have much money to spend.
3. As a country we are in a completely different place than in 1981. The Baby boomer generation was then just beginning to flood the labor market with energetic young workers. Now they (we) are just beginning to leave the job market in droves to retirement and the percentage of the population in their prime working years is much smaller in comparison.
4. Their arguments ignore the deficit. They tout the Reagan and Bush tax cuts as curing the recession, but ignore the fact both the Reagan and Bush tax cuts caused a huge spike in our National Debt. In effect the Reagan and Bush plans were sort of like if you or I stopped paying our bills. Heck yes, we would have more money to spend - for awhile.
5. Perhaps most damning is the fact they ignore empirical economic studies that have looked at what happens when a country cuts government spending and found that, in a low interest rate environment, there is virtually a 100% correlation between cutting government spending and a rise in unemployment and a drop in GDP.
Basically, if the Romney plan is implemented we face one of two options. If we chop government spending dramatically, we will sink into another recession or perhaps a depression. If we cut taxes without cutting government spending we put the deficit back onto its skyward trajectory, and since our problem isn't a lack of investment capital, we will see very little economic improvement in return.
We can't get out of our current economic problems by handing out more candy to rich folks, which is what the Romney plan is all about.
Footnote - Romney's plan has much in common with the Herbert Hoover plans in 1930-32 that turned a stock market crash into the great depression. Ironically, the most recent article I read pushing the Romney plan was by a Hoover Institute Fellow in the San Francisco Chronicle Insight Section for July 15, 2012 - evidently the Hoover Institute is still unwilling to accept that the depth of the Great Depression might be related to Hoover's private sector based attempts to reinvigorate the economy.
Monday, July 16, 2012
Friday, July 13, 2012
Fair taxes - How taxes on Capital should be structured
If one assumes that all income should be taxed equally so people share the burden of expense of government equally here is how taxes on Capital should be structured:
Dividends should be treated as ordinary income (as they used to be before the Bush tax cuts). They are distributed profits from a business and there is no reason to give them favorable tax treatment.
Capital Gain should also be treated as ordinary income. But there should be two special provisions, one for fairness purposes and one to encourage investment.
For fairness gain should be reduced by how long you held the asset to account for inflation.
To encourage investment you should be allowed to sell an asset and immediately roll the proceeds over into a new asset. All the rollover proceeds would not be taxed, and you would carry the same basis into the new asset (basis is how much of your own money you originally put in). This would need rules to ensure it is not abused, particularly when you are using borrowed money to buy an asset.
Tuesday, July 10, 2012
Income inequality
Heard an interview of author Edward Conard, a Bain Capital guy, who has written a book called "Why Everything you Have Been Told About the Economy is Wrong". The interview focused on what is apparently his main thesis, that income inequality is a good thing. In the interview it seemed the crux of his argument was that we are richer than Germany or Japan, and we have greater income inequality, therefore the reason we are richer is because the investor class in Germany and Japan are more highly taxed.
His argument in the interview did not address some pretty basic facts, so it makes me wonder if he addresses issues like:
1. He seemed to be focused on the period since WW II, does he address that time in our history that is most like our current situation, the roaring twenties and the Great Depression? Where we had rising income inequality and then an housing and finance based collapse that led to years of economic weakness.
2. In citing Germany and Japan does he address the fact we started from different places? At the end of WW II our country, our infrastructure and manufacturing capability were untouched, and in fact had been pumped up on steroids by the war. In Germany and Japan, on the other hand, the major cities were piles of rubble, big chunks of their infrastructure were destroyed and their manufacturing base was in tatters. We had a huge economic head start and the fact we are still are richer says nothing about our economy beyond the fact we have avoided catastrophe and kept moving forward.
2. Does he address population distribution? Because of our success in WW II we had a ton of kids between 1947 and 1957, the so called baby boomers. No such event occurred in Germany or Japan (or the rest of the world as far as I know). A result of that explosion in the number of children meant that in the period from the late 1970's through the early 2000's we had an extraordinarily high percentage of our population in what economists consider the prime productive years - the time of our life we we create a lot of wealth and build our financial life. The simple fact is if 5 out of every 10 people are in that time of life in country #1, that country is going to be richer than country 2 where only 4 out of 10 are in that period of life.
Perhaps he deals with these issues in his book. I'm sure the Economist will review it soon, unless that review suggests he deals with issues like these I will see no reason to read the book.
His argument in the interview did not address some pretty basic facts, so it makes me wonder if he addresses issues like:
1. He seemed to be focused on the period since WW II, does he address that time in our history that is most like our current situation, the roaring twenties and the Great Depression? Where we had rising income inequality and then an housing and finance based collapse that led to years of economic weakness.
2. In citing Germany and Japan does he address the fact we started from different places? At the end of WW II our country, our infrastructure and manufacturing capability were untouched, and in fact had been pumped up on steroids by the war. In Germany and Japan, on the other hand, the major cities were piles of rubble, big chunks of their infrastructure were destroyed and their manufacturing base was in tatters. We had a huge economic head start and the fact we are still are richer says nothing about our economy beyond the fact we have avoided catastrophe and kept moving forward.
2. Does he address population distribution? Because of our success in WW II we had a ton of kids between 1947 and 1957, the so called baby boomers. No such event occurred in Germany or Japan (or the rest of the world as far as I know). A result of that explosion in the number of children meant that in the period from the late 1970's through the early 2000's we had an extraordinarily high percentage of our population in what economists consider the prime productive years - the time of our life we we create a lot of wealth and build our financial life. The simple fact is if 5 out of every 10 people are in that time of life in country #1, that country is going to be richer than country 2 where only 4 out of 10 are in that period of life.
Perhaps he deals with these issues in his book. I'm sure the Economist will review it soon, unless that review suggests he deals with issues like these I will see no reason to read the book.
Friday, July 6, 2012
Bain Capital and whether Obama understands the economy
A lot of commentators, including some Democrats, are suggesting Mr. Obama's criticism of Mitt Romney's ties to Bain Capital show he does not understand how the economy works. What these comments suggest to me is that the commentators are the ones where the failure to understand is found.
Perhaps the commentator's could explain to we the audience how Mr. Romney's economic ideas differ from the ideas of the Coolidge/Hoover era Republicans who led the nation into the great depression, with its 25% unemployment. Or how his ideas differ from the ideas of the Republicans who seized control of both houses of Congress in 1995, and led the nation into the Great Recession and the economic morass we are still attempting to climb out of?
Perhaps the commentators could convince me it was just dumb luck that Democrats could control both Houses of Congress for 14 year, 24 year and 8 year stretches between these two periods of Business Republican domination without managing to blow up the economy. Perhaps the commentators could make the case the rising inequality, bubbles in housing and equities followed by spectacular economic collapse that marked the only two periods of Business Republican domination of government in the last 100 years were just coincidence.
The question isn't whether Bain Capital acted wisely or legally, or even whether hedge funds are a leech or a building block of our economy. It is whether the ideas that made the folks at Bain Capital lots of money can be translated to Government successfully and history suggests the answer is a resounding no. Business and Government have different purposes and goals, and business Republican's have a long history of demonstrating success in business is often an impediment to success in Government. In the private sector firing a bunch of people and paying off investors often makes for resounding success because the fired folks aren't the businesses problem. That approach does not work for Government because the laid off people are their problem, and are crucial to the consumer base on top of it.
Even the publication I read most regularly, the Economist, has gone down this "Obama doesn't understand" road. Yet that esteemed publication some months ago published economic data that suggested the initial collapse of 2008 was in fact worse than the initial collapse of 1929. Mr. Obama's bad luck was that, although he has done a
remarkable job of preventing another Great Depression, since the Republicans left the scene of the crime as the collapse was happening, they now can come back and argue Mr. Obama is the cause of the countries economic problems, and offer the same solutions they offered that twice crippled the economy.
Back when the great depression first began, luckily for FDR (unlucky for the country), Republicans remained in control for the first three years of the Great Depression, at which point unemployment was 25% so it was readily apparent to voters who really did not understand how to create jobs. Democrats elected FDR and controlled both house of Congress for the next 14 years.
Perhaps the commentator's could explain to we the audience how Mr. Romney's economic ideas differ from the ideas of the Coolidge/Hoover era Republicans who led the nation into the great depression, with its 25% unemployment. Or how his ideas differ from the ideas of the Republicans who seized control of both houses of Congress in 1995, and led the nation into the Great Recession and the economic morass we are still attempting to climb out of?
Perhaps the commentators could convince me it was just dumb luck that Democrats could control both Houses of Congress for 14 year, 24 year and 8 year stretches between these two periods of Business Republican domination without managing to blow up the economy. Perhaps the commentators could make the case the rising inequality, bubbles in housing and equities followed by spectacular economic collapse that marked the only two periods of Business Republican domination of government in the last 100 years were just coincidence.
The question isn't whether Bain Capital acted wisely or legally, or even whether hedge funds are a leech or a building block of our economy. It is whether the ideas that made the folks at Bain Capital lots of money can be translated to Government successfully and history suggests the answer is a resounding no. Business and Government have different purposes and goals, and business Republican's have a long history of demonstrating success in business is often an impediment to success in Government. In the private sector firing a bunch of people and paying off investors often makes for resounding success because the fired folks aren't the businesses problem. That approach does not work for Government because the laid off people are their problem, and are crucial to the consumer base on top of it.
Even the publication I read most regularly, the Economist, has gone down this "Obama doesn't understand" road. Yet that esteemed publication some months ago published economic data that suggested the initial collapse of 2008 was in fact worse than the initial collapse of 1929. Mr. Obama's bad luck was that, although he has done a
remarkable job of preventing another Great Depression, since the Republicans left the scene of the crime as the collapse was happening, they now can come back and argue Mr. Obama is the cause of the countries economic problems, and offer the same solutions they offered that twice crippled the economy.
Back when the great depression first began, luckily for FDR (unlucky for the country), Republicans remained in control for the first three years of the Great Depression, at which point unemployment was 25% so it was readily apparent to voters who really did not understand how to create jobs. Democrats elected FDR and controlled both house of Congress for the next 14 years.
Monday, July 2, 2012
Bring back the item veto
One of the huge issues that Republican's and Democrats beat each other over the head with is earmarks. Earmarks, those dollops of Federal dollars that members of Congress hand out to their districts to curry favor are made possible by the budget process where the President, when he gets a budget from Congress, faces an all or nothing choice. He can either veto the entire budget, or swallow any objections and sign it.
Some states, including California, provide the chief executive with the power to veto individual expenditures while still approving the overall budget. It is called the line item veto here in California. Item veto's are not a cure for all government fiscal impropriety, but they are a useful tool, particularly in the sense that they give taxpayers one person to hold accountable for funding programs that really don't deserve taxpayer dollars.
Back in the early 1990's, Republicans trying to get back into power in Washington by hammering Democrats on the deficit, pushed through a bill giving the President a line item veto. A year or two later the Supreme Court held it was unconstitutional. One would think the Republicans, who by that time controlled both houses of Congress, would have proposed and pushed a constitutional amendment to allow the line item veto. But, since they were now the ones handing out earmarks to curry favor with voters, they evidently lost interest - probably in part because Bill Clinton was President and they didn't want to give him the power to veto their pet projects. The notion of a line item veto sank into oblivion.
It should be revived. Whats happening in Europe is an object lesson on how hard it is to control government expenditures. An item veto would be a useful tool.
Some states, including California, provide the chief executive with the power to veto individual expenditures while still approving the overall budget. It is called the line item veto here in California. Item veto's are not a cure for all government fiscal impropriety, but they are a useful tool, particularly in the sense that they give taxpayers one person to hold accountable for funding programs that really don't deserve taxpayer dollars.
Back in the early 1990's, Republicans trying to get back into power in Washington by hammering Democrats on the deficit, pushed through a bill giving the President a line item veto. A year or two later the Supreme Court held it was unconstitutional. One would think the Republicans, who by that time controlled both houses of Congress, would have proposed and pushed a constitutional amendment to allow the line item veto. But, since they were now the ones handing out earmarks to curry favor with voters, they evidently lost interest - probably in part because Bill Clinton was President and they didn't want to give him the power to veto their pet projects. The notion of a line item veto sank into oblivion.
It should be revived. Whats happening in Europe is an object lesson on how hard it is to control government expenditures. An item veto would be a useful tool.
Thursday, June 28, 2012
On leadership
I heard often as I was growing up that God "puts up over men the basest of men" (Daniel 4:17).
While calling leaders "the basest of men" is pretty harsh and judgmental, I think there is some truth to the basic idea that the people that seek leadership are a little bit different than the rest of us. They are prone to believe they are exempt from the rules that apply to other folks, and prone to mistake their own self interest for the interest of the enterprise.
We see a couple of examples in the news currently here in the Bay Area. The recently elected Sheriff in San Francisco has just been convicted of spousal abuse, while here in Berkeley, after folks in town got pretty upset when an older fellow was beaten to death in his yard while the police were occupied elsewhere, the Berkeley police chief sent a uniformed officer to knock on the door of a local reporter about midnight to try to get a story in the newspaper shaped more to his liking.
In my experience the people that become leaders aren't necessarily smarter than others, but they are more ambitious. They are good at focusing on their own self interest, and how to achieve their goals but often a little bit insensitive or downright oblivious to whats in the interest of the enterprise of which they are a part.
I think this is especially true in the public sector, where productivity is often hard to measure. People that are verbal and social and focused on their own advancement can climb the ladder faster than people that are more focused on what is good for the enterprise.
In the private sector, although the politicians and the media often use the terms " entrepreneur " and "businessman" interchangable, to me they are usually completely different personalities. It seems to me many Corporate CEO's are more notable for their ambition than for their management skill. There are currently many in business that wrap themselves in the mantle of the entrepreneur to use the good will we all hold toward entrepreneur's that create new ideas and enterprises as leverage to gain advantages from Government that to not benefit the wider economy.
Monday, June 25, 2012
Wish list - deleting electronic spam from my life
I waste a lot of time, and incur a significant amount of aggravation with unsolicited phone calls, emails and text messages from people trying to sell me something.
This blog is to throw out an idea in the hope some tech genius will pick it up and run with it.
Why can't some company provide phone, email and text services that provide that anyone who wants to contact me has to pay me a nickel. I can create exceptions for family, friends, business associates or other people who I want to be able to contact me for free, but everyone else pays me a nickel. Maybe my provider takes a $.01 commission from my nickel for providing the service.
I think the volume of phone, email and text spam would drop hugely if it cost spammers a nickel for each spam message then sent. Life would be significantly less aggravating and I would be more efficient if I wasn't regularly interrupting what I am doing to respond to what turns out to be someone trying to sell me something I am not interested it.
This blog is to throw out an idea in the hope some tech genius will pick it up and run with it.
Why can't some company provide phone, email and text services that provide that anyone who wants to contact me has to pay me a nickel. I can create exceptions for family, friends, business associates or other people who I want to be able to contact me for free, but everyone else pays me a nickel. Maybe my provider takes a $.01 commission from my nickel for providing the service.
I think the volume of phone, email and text spam would drop hugely if it cost spammers a nickel for each spam message then sent. Life would be significantly less aggravating and I would be more efficient if I wasn't regularly interrupting what I am doing to respond to what turns out to be someone trying to sell me something I am not interested it.
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