Short and Sweet Blog

Oh no, our “car’s in the ditch!!!”   Until the recent election we heard variation upon variation on this refrain: (1) the previous administration drove this “car in the ditch”; (2) we need to fundamentally transform the US in order to get the car out of the ditch; and, (3) the opposition needs to stop complaining about the necessary repairs and get in the back seat.  In light of the results of the election I am apparently not alone in feeling frustration at the singers of this song.  

Presidents Obama, Clinton, Bush I and Bush II

The pertinent questions as I see them are these.  What are the basic economic fundamentals which represent the “road” upon which our national car drives?  How did our past presidents, particularly Bush, drive “the car” into the ditch?  Does “getting out” of the ditch require different style of driving than keeping the car on the road in the first place?  How does the current government’s driving measure up?  

I think the fundamental question about an economy is whether it allows and facilitates the creation lots of wealth for ourselves and others?  When the economy, the GDP, grows Americans seem to feel that we all become wealthier to a greater or lesser extent.  At least, based on their public statements, politicians seem to agree.  In order to seem in step they are constantly talking about  whether the economy is in recession or is “growing.”  From this agreement between the public and the politicians, I conclude that I am right and that the policies which allow Americans to create more wealth are the basic economic fundamentals of our country.    

What do we mean when we talk about wealth?  How is wealth created?  According to businessdictionary.com wealth is ‘any tangible or intangible thing which makes a person, family or group better off.’  Seems like a good common-sense definition to me.  What we create through our own efforts is wealth.  When we trade our wealth with others trying to make ourselves and our family better off we create even more wealth.  Why is it that more wealth is created when exchanges are made?  Why isn’t an exchange just a “zero sum game” where people have just traded things of the equal value?  The conclusion that trading creates wealth in addition to that which existed before is based upon a fact of human nature which is that two people will not trade  unless they both expect to be better off, richer, after the trade than beforehand.  Likewise, when fewer transactions occur, less wealth exists because people keep what they have.  The more that people exchange their wealth with others, the more total wealth we have as a nation of individuals.  Therefore, any policy which increases trading among us leads to creation of yet more wealth.  Policies which depress the number of trades, on the other hand, lead to a static or negative trend in wealth.  We might call them, those policies, negative fundamentals.  An important fundamental of the economy then, it seems clear to me, is whether government policies encourage or discourage the creation and trading of wealth.  

All economies which are referred to as “advanced economies” have pursued economic growth based upon specialization, the so-called ‘division of labor. ‘  This way of doing business maximizes wealth because it increases the production of all things.  Individuals will usually spend their time producing things which they are most expert at producing.  Wealth will not be maximized by a person learning to do many things kind of well.  He will maximize the value of his work by learning to do one thing very well and then trading with others to get the other things that he wants.  If he specializes and people are interested in transactions with him, he will generally be much better off than if he had learned to do a lot of things only marginally well.  It is a fundamental of a system of specialization that it causes large numbers of transactions because no one can subsist or create everything he needs and wants by his own efforts.  

What causes people to stop or slow down their normal trading activities in a division of labor style economy?  Why would people ever stop trading when they know that trading makes them wealthier?   There are at least three conditions which will cause people to stop trading.  The first is when people believe that what they have to trade will be worth more tomorrow than it is today.  The second is that they believe that what they want to trade for will cost them less tomorrow than it does today.  The third condition which will stop trading is when the public believes that they need to conserve the things they have today in order to protect themselves and their families tomorrow.  

Enter the dollar bill.  It is small, it is transportable and it is protected by the government.  It is generally assumed by people that the dollar bill will have the same or nearly the same value tomorrow as it does today and therefore it acts as a reliable store of the value of the many trades which people make.  The dollar bill has been a “store of value” for the people of US for the last 100 years and for the world for the last 65.  Having a reliable and durable store of value is indispensable to the specialization economy.

Okay we know all this.  Is it possible that there is a relationship between the perceived future value of the dollar and the reduced value of the current transactions we see in the economy?  This is a difficult proposition to believe because if inflation is perceived as a threat in our economy, and I believe it is, people should be trading like crazy to avoid the future price rises.  Why then aren’t they trading?  Are there other perceptions affecting their desire to enter into current transactions?  Yes.  As indicated above, the public believes that they need to conserve the things they have today in order to protect themselves and their families from what, the shape of which they are not quite sure about, may happen tomorrow.          

Therefore, the fundamental feature of the current economy is the uncertainty and outright pessimism about the economic present and future.  FDR’s famous line in somewhat similar times was, “All we have to fear is fear itself.”  Did Bush or his fellow former presidents do something or several somethings wrong on the economy in order to cause this uncertainty and even profound pessimism? 

 Historically George W. Bush took office at the end of an almost ten year expansion.  The American economy officially entered recession (a period of reduced transactions) in March 2001.  To use the current economic analogy, one or more previous driver(s) had driven the car off of the road before George the Second took the wheel.  Then, less than 8 months after Bush took office, our country was devastatingly attacked by al Qaeda operatives on 911.  The realization of significant risks to our country, which had not been anticipated by the population before, suddenly dawned upon them.  The cost of defense and security precautions skyrocketed as a result of this change in status.  Bush was widely mocked when, in response to the misgivings of the people, he went to the American people and asked that they return to business and leisure as usual.  (Apparently FDR and Bush were not accorded the same credit for their insight.)  Bush, and FDR before him, were interested in either increasing or at least sustaining  the level of transactions in the US economy.  In his view, not unreasonably, this would protect our prosperity and deny al Qaeda their goal.  He also lowered taxes for 100% of taxpayers in the country.  After a few months of economic problems things got better, economically at least, and remained so until nearly the end of Bush’s second term, 2007-8.

Why did things at first improve and then head south on Bush’s watch?  With the tax cuts and the lack of attacks on the homeland things improved in part because of what Bush asked the country to do, go about their normal business.  He was abetted in preciptating the ‘good times’ by a Fed which kept interest rates, including mortgage rates, down.  In large part the good times in the middle of the Bush administration represented a lot of housing transactions, it represented consumption fueled by increases in the ‘equity’ apparently held by individual home owners and it was further abetted by consumer borrowing spurred on by low interest rates.  The Fed didn’t take away the punch bowl at the party this time. 

Then things turned down, why? First and I believe foremost, there was the financial storm.  This was caused by the squandering of vast quantities of money on building unnecessary and luxurious housing for people who could barely afford to pay for it as well as profligate spending on other consumer goods which went to fill all our houses.  The resulting cascade of unpaid loans and credit cards, foreclosures and short sales caused a problem with our financial system which was actually made much worse for the economy by arcane financial derivatives and the bundling of mortgages for sale in the general investment market.  Everything, it turned out, was tied together in a neat bundle and when one knot went everything went.  When people couldn’t pay for what they had purchased, the stuff just hit the fan with both real and psychological effects.

In addition to the negative effect of the sub prime meltdown on the mortgage market, previously built homes overhang the market.  This situtation makes it questionable whether homes already in private hands with loans in good standing will hold their value much less appreciate.  Where have all of the TV advertisements gone which used to ask people to use the equity in their homes as checking accounts?  

Add to this dicey circumstance the recognition of the potential for economic devastation represented by $4.00 a gallon gasoline.  The $4.00 a gallon shock took everyone by surprise back in 2008.  Now the American people are well aware of the nascent crisis in Iran (and the Persian Gulf) and the fact that the government shut down oil exploration in the Gulf of Mexico.  Everybody knows that these, along with the falling value of the dollar, could drive up gasoline and other energy costs for both the short and middle term.   Take all this together with a few moves by the government in the recent past showing even more interest than usual in picking economic winners and losers and the end result is that people are feeling defenseless and economically vulnerable and in no mood to spend money.  In that regard some of our leaders dramatize, by their own words, these and other reasons for concern.  First, the President.

And then the ever popular Robert Gibbs, White House Press Secretary.

And Vice President Joe Biden.

And Treasury Secretary Tim Geithner.

And Fed Chairman Bernanke.

And what of the effect on the economy of the debt which consumers have already built up over the last twenty years.  Does this have an effect on what consumers do in the here and now?  It has had some effect, I believe.  Over the previous seven quarters, according to a Fed report issued in August, the amount of consumer debt has fallen 6.5%.   This reduction, whatever the underlying causes, has a two fold effect.  It means that the consumer has less income to buy things since that part of their income is being used to repay debt for previous purchases.  It also means that the consumer wasn’t interested in securing additional debt for buying new things.  Overall, a reduction in transactions.

In sum then, what do we know about the fundamental state of our economy in terms of the likelihood of increasing transactions?  We know that housing value (a house is the largest asset held by most consumers) is likely to stay static or recede in the short and perhaps medium term which means people are going to have to save more for retirement.  We know that as recently as 2010 when the House passed the Cap and Trade bill, Washington politicians were interested in continuing to hector the public about their energy usage.   We know that some aspects of social security and medicare are on the chopping block.  We know that the public has had a taste of what $4.00 a gallon gasoline was like and didn’t like it.  We know that the income taxes of nearly everyone who has enough income to buy big ticket items without adding to their debt (like John Kerry and his new yacht) is going to be targeted for a significant tax rate hike either now or at the latest, ‘when things get better.’  We know that the bill for the vast amount of wealth destroyed by the sub-prime mortgage mess is still trying to find a place to land permanently and the public is smart enough to figure out that it might just decide to land squarely on their bank accounts and retirement accounts.  Does anyone (other than John Kerry) feel rich?  Even he doesn’t feel rich enough to promptly pay his yacht tax in Massachusetts.  

Given all of the uncertainty and difficulty hanging over the people of this country are you still wondering why people are not buying big new things or investing in new equipment and business or borrowing more money to consume consume consume?  What is being done to improve the economic fundamentals, to increase people’s interest in trading? 

Here’s what one American, an Obama fan no less, thinks about the situation.

Regardless of which of these problems is the fault Bush & Co. and which is the fault of others,  I’m not surprised that we’re not climbing out of the ditch yet.   When we add to the mix the immense increases in Federal borrowing to “avoid a depression” the bill for “business as usual” seems high indeed.  The people look on the mess and are very afraid.  Can you blame them for trying to save for a rainy day?

More data has arrived on what Progressives believe.  Speaker Pelosi recently threw some red meat to her constituents at a meeting of the “Women of Steel,” a group associated with the United Steelworkers Union.  In the midst of a diatribe against the Republican job-destroying policies of George W. Bush she made some illuminating and, to me, frightening comments.

Pelosi affirmed her primary economic principle.  What is economically beneficial for her political sponsors today is what is “good.”  Therefore, her unflinching vision of a progressive America is as a place where “ownership” of property can be directly changed by government edict.  In addition to merely manipulating income tax rates and increasing transfer payments Pelosi now wants to allow political elites to directly transfer after tax ownership of existing property to more deserving people.   If anyone had illusions, she has now dropped all pretense to being friendly to economic freedom.  She is in favor of any policy which satisfies her vision of “economic justice.”

America, to Pelosi’s mind, is apparently just an unjust place where only some people can produce wealth without the intervention of government to help them.  Apparently, according to her, most people, her people, just lack what it takes in order to create wealth on their own.  This is wrongheaded and should be deeply insulting to those she seeks to help.  In their pride they should reject her and her form of “help.”

Government, in Pelosi-world, can reassign ownership of wealth in order that the little people may have ownership of a bit of it.  In this thinking she fundamentally misunderstands the concept of wealth, the process of creating wealth and the underlying nature and effect of involuntarily “transferring ownership” of wealth.   

What Pelosi fails to realize or actively discounts is that wealth is a result of a truly creative process on the part of a human being.  It happens as a result of the interaction between the abilities, qualities and talents of a human being and the world he or she lives in.  It really is just as simple as that.  A peson can take a piece of wood of little value as such and make something of more and perhaps much more value from it, like a bow and arrow.  Take a quarter pound of ground beef of value as such and spice it up, learning in the process a way to make the best tasting hamburger in the world.  Create a new way to use the internet to network people socially.  In each of these situations and in innumerable others a human, by interacting with his (or her) world, creates wealth.  Bringing into existence a thing of value which did not exist before is a human effort.  Owning wealth, when rightly understood, is just the ownership of a thing of value which was created by you.  When a human being interacts with the environment and creates a thing he creates wealth and in this country he can have ownership of that thing, that wealth.  Hence ownership of wealth is a simple but immensely powerful concept that is inextricably connected with it’s creation and therefore with the consequent improvement of the wealth of society. 

It is undoubtedly true that some people are luckier than others.  Thomas Edison suggested that invention was 99% perspiration and only 1 % inspiration (both of which are characteristically human).  In this he may have been biased in this assessment preferring to attribute his own success to the superioriority of hard work rather than the good fortune of a sharp and creative mind.  The antithesis of Edison is a person who perspires and perspires year upon year and yet is never able to create anything perceived to be of real value by others (Van Gogh comes to mind here).  Likewise there are also certainly others who perspire little but who are very fortunate in having an insight or talent at wealth creation who perspire little.   It is a fact of life as well that some people lack courage or energy or intelligence or imagination or luck and decide to look to others to be told how and when to create things of value, like using someone else’s recipe to cook the world’s greatest hamburger while working at some one else’s fast food joint.  But one way or other we all benefit from either our own creation of wealth or the creation of wealth by another person who gave it to us or shared it with us.  This is how the world of economic freedom has worked since human beings came to be.  Apparently Ms. Pelosi doesn’t like this model one bit.  She prefers to focus not on the creation of wealth but upon its distribution and apparently now upon it’s reassignment. 

Money (what many people mistakenly take for wealth) accumulates around a wealth creator because when that person owns a piece of wealth he can exchange it for something else.  This mechanism applies as much to the wealth represented by an hour of labor creating wealth from interacting with the environment which an employer has created as it does to an invention created alone in a garage.  Money is the usual medium of exchange which facilitates this free transfer of wealth.  Money is also designed as a store of the value received by the person trading real wealth for it.  It allows the seller to retain the value of the sale for an indefinite period of time and this is the reason that it is often mistaken for wealth itself.    

What right does Nancy Pelosi have to endorse taking wealth from one person and assigning it to another?  How does this action encourage the formation or creation of more wealth?  What kind of a country do you have when the ownership of wealth is insecure?  Although it is true you can create, by redividing wealth, an egalitarian place where everyone is economically equally well off for a short time, at the same time you also create a place in which people become disinterested in creating new wealth which they cannot own and trade.  Is it not clear that this seemingly egalitarian system leads over time to everyone being more rather than less focused on themselves?  Doesn’t this system retard the creation of things which have value to others because each thing created is subject to being taken involuntarily by the government to be “shared” with everyone?  And wouldn’t such an unhealthy situation tend to become more and more pronounced over time leading to more and more selfishness since people would no longer have to create things that please one another in order to get along?  And finally wouldn’t this system result in a less wealthy society?  

If your experience of the real world tells you that a wealthier society will come from Ms. Pelosi’s experiment with wealth reassignment, please let me know why and how you see it working in practice.

The future of Obamacare looms large in the upcoming off year elections.  Should it be repealed?  Can it be repealed or otherwise stopped with a majority but not a two thirds majority in each house prepared to override vetoes?  If the Democrats retain both houses will a public option be included, as was proposed this month by Rep. Lynn Woolsey (D – Cal.) head of the house Progressive Caucus?  With premiums still rising in the wake of Obamacare’s passage who will get the blame?  Will the blame have any political effects?

Rep. Lynn Woolsey

I’d like to talk about what happens if Obamacare is not stopped and we are all left to feel its effects in the middle of the next decade and beyond.  In fact, it seems inescapable to me that if Obamacare survives the next round of elections that the public option will inevitably come to pass.  This must happen because Obamacare mandates that all are covered and that there be no limitations on that coverage for those who have only recently become insured.  This must drive  up premiums with the effect of pushing most private employers out of the health insurance market. 

This being the case, it is important to examine what happens when a governmentally dictated program controls prices.  When prices are controlled how are total costs affected?  Is the Medicare program a model for how Obamacare will work or are there going to have to be fundamental changes?

Why did the government so vastly miscalculate the projected total cost of Medicare even while it had control of the prices which it paid to providers? Well, in the first place the life expectancy for people aged 65 and older grew significantly subsequent to the enactment of Medicare.  There are therefore lots more patients than was actuarially anticipated. Was this increase in longjevity a coincidence? It appears to me that this outcome resulted from the fact that an enormous market of retired people created who could now pay for all of the medical services which could be defined as being medically necessary.  In other words the existence of Medicare fundamentally changed medical outcomes for the elderly which in turn fundamentally affected the financial aspects of the program. This occurred because the medical industry, knowing it had a large and well financed group of customers, developed lots of ways to extend the useful and comfortable lives of those customers.  These new treatments then became, nearly by definition, medically necessary and therefore were paid for by Medicare. In this way the Medicare entitlement spurred medical innovation and progress and led to generally better health outcomes for the elderly.  This improvement in overall health care included the rest of us who benefitted through a trickle down process from this medical innovation.

Was this a bad thing since it ballooned costs tremendously? This analysis depends, of course, upon one’s point of view. Clearly, extending and adding comfort to the retired leisure years of people who, by and large, were no longer economic producers, was a very good idea from the standpoint of those benefitting. As the politicians constantly remind us, Medicare was and is wildly popular with the public nearly all of whom are  on it or hope to be on it someday. Duh!!!

As a result, the elderly, became very politically active in defense of this entitlement as well as in defense of Social Security, understandably fighting every attempt to limit them. They became a politically powerful voting block. Whether good or bad, however, Medicare’s success and its creation of a voting block with older citizens clearly sewed the seeds of its own financial difficulties.

How will Obamacare work it’s magic? Will it subsidize medical innovation and better health outcomes like Medicare did? Will these medical innovations, which will be available to all, reduce prices because of economies of scale?  Will Obamacare force enough ‘efficiencies’ in the system so that it can remain viable without substantial amounts of financial pain? Can Obamacare or, for that matter, the entire country financially survive if Obamacare follows the Medicare model of ever expanding innovation and better outcomes?

The government, using the tools provided by Obamacare, promises a reduction or at least a freeze on the overall cost of health services and an actual increase in availability of those services. Is 16% of the economy enough? Can we afford more? How can we get more for less? Can we get more for less by capping overall costs or reducing prices as was done with Medicare even though the mix of beneficiaries of Obamacare are annually becoming actuarially older and therefore sicker? Can we logically expect to get the same quantity of high quality services for less money? Perhaps if you believe in the tooth fairy you will believe that you can have more for less but didn’t you grow out of that idea by the time you were ten? Am I being overly pessimistic?  Do economies of scale work effectively in a business which is delivered on the basis of a one on one (doctor-patient) business model?  For the unbelievers amongst us how will overall costs and costs per beneficiary be lowered absent fundamental changes in that doctor-patient relationship?

If the law of supply and demand tells us anything about the relationship between prices and supply there is no doubt what is going to happen. When you artificially cap prices, over a period of time you will get less supply, it’s that simple and it’s also absolutely immutable. Therefore demand will have to be reduced in order that demand and supply stay in equilibrium at the capped price. How can the government reduce demand for medical services, oh let’s think? Obamacare must, of course, become a giant rationing system in order to reduce real demand or shift the demand to other goods and services than those which have been available to date. Despite indignant denials, the government, hard pressed on all economic fronts, could even decide to reduce costs by reducing the availability of life saving treatment for older people. Remember that Obama himself said that he is in favor of trading off expensive life extending pacemakers in favor of palliative pain medication for older Medicare recipients. Oh and wait, reducing the life spans of seniors would have the double benefit of supporting the solvency of Social Security. Of course, this association would never occur to the government would it?

How can Obamacare not become a political rationing scheme? When something is politically rationed it is, by definition, taken from the politically less powerful and given to those more powerful. That, in my opinion, is a simple and immutable result of politics. Political rationing will prefer some demographic groups to others and even some “popular” diseases to other less “popular” ones. You may remember the competition in the 1980’s and 1990’s for government research dollars between cancer and AIDS research groups and, not surprisingly, therefore between the sufferers of those two diseases. Who will be on the winning and losing side of that equation? Congress spoke about the political power relationship when it exempted its current and retired members from Obamacare. Members of Congress were clearly winners. Who will be the losers?

First let me disclaim any intention to argue, in this post, for the rightness or wrongness of the tax policies advocated by democrats or republicans or the administration or the congress.  I am willing to start from zero in arguing about the best tax policy for our country.  All I am trying to do in this post is to clear away some of the politically loaded debris involved in talking about taxes.   Taxes are, after all, a given of life.  About taxes we all believe in the saying, “Don’t tax you and don’t tax me, let’s tax that fellow behind the tree.”  However, tax policy, as opposed to tax politics, ought to be based upon a wise and articulable basis as to why it is best to fund government by imposing upon some in different proportions than others.  It may very well be that taking money from some and leaving it with others is good for the country but that is what we should be talking about.  We should ask questions like, what would you or people like you do with the money which might otherwise be taken in taxes?”  Is one person’s consumption better than another’s?  Is there a societal benefit derived from investing wealth?  Should it be subsidized?  If so, is there a societal benefit in allowing people to accumulate wealth to be invested?  When we refuse to enter into this debate we are being disingenuous and expedient.  We are refusing to look at how this country actually operates and what makes it successful and instead we focus upon the “politics” of taxes, whose ox is being gored.

Tim Geithner, the Treasury Secretary, was interviewed today by ABC’s Jake Tapper concerning the Obama position on expiration of the Bush era tax cuts.  During the interview Geithner advocated at least two discrete policy positions.  First, Obama would let the income tax rate cuts expire for those “wealthy” earners who earn more than $250,000 a year effectively allowing the highest marginal income tax rates to increase from 36 to 39.6 percent.  Notwithstanding this pursuit of the “wealthy” to pay more in income taxes, Geithner also emphasized that Obama would see that taxes on capital gains and taxes on dividends would not increase above 20 per cent.  This 20% cap on income from capital gains and dividends is, of course, without regard to the actual total income of the receiver.  It is also not subject to the Alternative Minimum Tax (AMT) which was enacted to make every one pay their fair share.  Geithner and Obama have effectively drawn a line between two groups of taxpayers.  The  wealthy whose income comes in the form of passive dividends and capital gains and those wealthy whose income comes in the form of salaries or the net profits of their own businesses.  Of these two groups which are “the wealthy” as that term is understood in the taxing imaginations of the vast majority of Americans?  Do we see those people getting up at 5:00 a.m. to go out and run their businesses as “the wealthy” or do we see as “the wealthy” those who sit around and clip coupons from “tax free” municipal bonds like Ross Perot or collect dividends paid by Exxon, Shell and the like.  This latter group is precisely the “wealthy” who Warren Buffet chided for being taxed at a lower rate than his secretary!!!!  

How can it be that the working “wealthy” who are also paying large amounts of self employment and medicare taxes are deserving of having to pay yet more while those who “invest” are taxed at about half the income tax rate of the former and pay no social security or medicare taxes at all?  Who is better off, those who must labor to earn their pay or those who “live off the fat of the land.”  In the latter group of investors I believe you would place such wealthy democrats as George Soros and Theresa Heinz Kerry among many, many more. 

My simple and only point is that our politics make a certain group  “the wealthy” who should pay more while another group, with equivalent or even higher incomes, are politically allowed to pay less.  The politically loaded language of this “debate” actually allows the “investing wealthy” to advocate soaking the faux or “working wealthy,” who are really just the upper middle class, while pretending thereby to be oh so generous.  It reminds me of this speaker at an SEIU rally who was so concerned with the plight of government that she wanted the government to “raise my taxes.”  I doubt very much that it was her ox she was talking about!!!!

Tax debates ought to be more about what’s good for the whole country and less about what’s good for the various groups of voters.  The framing of the tax debate as a political choice between different “classes” of taxpayers has had another pernicious effect, it has actually resulted in our shifting a large percentage of the tax burden to our children and the unborn through borrowing and promising more than we can deliver.  The innocents will never even have the chance to vote about whether to accept this burden from us.  They will never receive the benefits.  The debt will just be there when they reach adulthood and they will have to pay.  I hope we can do better.  We’re going to need to be more straightforward and less partisan in this debate if we are to survive as a free republic.  I hope I’m not being too naive.

P.S.  The graph presented at http://www.quickanded.com/2010/02/effective-tax-rates-of-the-richest-400-americans.html presents my point perfectly concerning the effective income tax rates of the truly wealthy as opposed to rates applicable to the merely working higher income upper middle class.