Still kicking

Well, I got tired of sitting by while Rome burned. I decided to run for Congress in the Indiana 4th district. If you found any of this interesting, check out my website hassforcongress.com or check me out on Facebook.

Wider is safer

Basic Premises:

The only way to ease any debt crisis is to raise after-tax income in relation to debt payments. 

Congress should act now to raise after-tax income, or at least keep it from falling faster.

The quickest way to do this would be to cut taxes now.

A broad-based tax cut can be in workers paychecks within a month, before millions more lose those paychecks.

Widening the size of the brackets would make a lot of sense, since there is a great gap between marginal tax rates (up to 35%) and effective tax rates (about 12% of AGI, adjusted gross income).

Cutting the corporate tax rate would help maintain investment and employer solvency during the credit panic, while regaining competetiveness with our trading partners.

The situation: 

Personal spending, income, employment are falling while debt defaults and foreclosures are increasing. Since one man's income is another's expense, income is falling as well. Last quarter's report on GDP showed a rise in the nominal GDP of only about 1% rate per year. After inflation, that represents contraction. As businesses and households try to repay their debts on falling revenues, the situation only gets more difficult. Since the crunch is/was world wide, other people, businesses and governments are trying to do the same tightening of their belts.

While governments around the world have tried to shore up their banking systems, to maintain the capacity to lend and create money, the source of the problem-- doubt about mortgage repayments here in the US-- remains unresolved. A nasty recession could throw many more mortgages that are current and being repaid on time into the late or default category. This would spread the panic again. Households cannot all sell assets at the same time, creating a further glut of unsold homes and cars and stocks and furnishings, and raise the money to pay their debts.

Since the US government has the capacity to borrow cheaply, while most businesses and individuals are facing rising difficulty or higher costs, the government can lower taxes to raise incomes back to where they were, or close, in the aggregate. This would provide all parties more time and money to work out their situations in a less forbidding context. Lower taxes would raise after tax cash flows, making up for some of the missing income that people were expecting.

A rebate would provide a one time increase in income, leading people to fell a bit better off, yet it would not provide much of a lasting effect unless it was very large. Most studies show that only 20-25% is spent in the quarter it is received. To replace a loss of $9 trillion is stock market wealth alone would be an almost impossible task. Even to replace a 3% decline in income-- about $300 billion-- would require a rebate of much more than that $300 billion, since recipients would likely see it as a windfall, not to be squandered. A rebate was tried in the beginning of 200, yet here we are still in recession.

Since the 1970's, fear of inflation has constrained the amount of any fiscal stimulus due to the ongoing inflation that we were experiencing. This is less true now that in decades. Inflation is low and falling and so is future inflation!

The recommendation:

A large and continuing tax cut would lead to a stabilizing trend in consumption, as people spent the addition to income and spent some of the future tax cut by borrowing more or adding less to savings.

A simple way to reduce the dead weight loss of the income tax would be to widen the tax brackets, so that fewer people face rates above the basic 10%,  the rate that collects most of the revenue. In fact, that-- rate 10%-- collects more than half of the present income tax revenue on a marginal basis. Congress could more than double the width of the income tax brackets and still increase borrowing by about half of the "stimulus package" Paul Krugman recommends.

Since rising incomes over time push people into higher brackets, this would undue some of that effect. It would lower the "tax wedge" between payer and receiver, allowing market incentives more effect. Wider brackets would make it easier to estimate ones liability for planning purposes. Those high rates that make tax avoidance so profitable would be reserved for fewer taxpayers, yet leave the top rate on the unpopular rich unchanged. While not the best cut from a supply-side perspective, it still should have a price effect on the general supply side of the economy.

Make 'Em Wider

Botero's version of the Mona Lisa.

For Colombian artist Botero, perhaps these fat images symbolized prosperity and contentment.  In these days of retrenchment, perhaps some widening of the tax brackets is needed. Economists of the neoclassical bent try to calculate the deadweight loss of the income tax. That is the loss of welfare to society from the price and collection-cost effects of a tax over and above the income effects. For instance, tax avoidance, record-keeping, and tax planning are associated with all systems of taxation. Price effects reduce the revenue base through a myriad of pathways. the higher the price, the greater the effect. The number of studies seem to be endless.

After 95 years of the income tax in the U.S., How does the current system stack up in international comparisons? Check the World Bank. While the amount raised is modest, and it is rather more progressive than most systems, the time and effort to comply is rather onerous. So much could be done to simplify the system yet again, like it was attempted in 1986, and many times before.

The most simple system of course is a flat comprehensive tax withheld at the source of payment. We could move in this direction rather easily for most folks today, if we wanted, by widening and reducing the number of brackets again.

Blue sky thinking

Like this dog Brandy, an American immigrant to Colombia, many are dreaming of a better time. Although a poodle can never really fly, the US economy can and will improve. Let's take a moment to dream about what we could accomplish.

Back when I was young, a new movement was sweeping the West. We thought of a world simpler and freer, with more choice and individual autonomy. A more prosperous world with fewer, more useful restrictions on human action. Most of the energy and coherence has dissipated from the libertarian movement of the 70's and 80's, but let's recall some unfinished business.

Trade reform, tax reform, regulatory reform, government limitation, the end of mining the government, health reform and stable money are all projects that have slipped off track in the last few years.

Back in my business school days, I spent a good deal of effort to try to understand economic policy during the great depression. After grinding through Friedman and Schwarz's "A Monetary History of the United States...." and endless microfilms of the Wall Street Journal from the 20's and 30's, I was struck by how different the policy framework and thinking was at that time. Almost all the world was on some sort of commodity standard, usually the gold standard, that limited any one government's ability to inflate, or fight global deflation. The income tax was new and highly variable, while only one in five (20%) of earners paid income taxes. Little international trade took place. Central banking was new to the United States. Customs duties provided about half of federal revenue.

Yet some things stood out as contractionary. The Smoot-Hawley tariff raised the tax wedge on the importation of hundreds of items. Raising the income tax while the economy was contracting, more than doubling the top rate, invited more contraction and capital flight. As was the huge increase in the death tax and the raising of excise taxes. Cutting federal spending across the board in 1933 didn't help the demand picture either. The Fed misinterpreted the fall in lending as a normal response to falling trade, rather than a reflection of high real interest rates. Endless meetings of the Federal  Reserve Board featured some who wanted to hold off on cutting rates to "keep their powder dry" for the real crisis that was yet to come. Even after successive banking crises, many worried about future inflation of the currency.

 Most of the policy efforts were spent on temporary reacions to repeated crises. Emergency bailouts and mergers, sand-still agreements and moratoria dominated policy headlines. The RFC (Recontruction Finance Corporation) made huge loans or invested in special issues of stock to big business to help the stay liquid, and perhaps expand. Since they had made almost all of their loans in secret, good government types sued and won to reveal the recipients. This made the companies look week when the RFC involvement was published in the papers. A policy that was designed to reassure investors and depositors lead to still more runs on the banks.

Some public works projects were undertaken, trying to boost employment, but higher taxes negated and effect on general demand, which would have been tiny anyway.

A great deal of effort went into suppressing "cut-throat competition" and other efforts to suppress adjustment to the new levels of demand.

In retrospect, much of the policy we see as counter-productive today can be explained by the huge importance of maintaining the gold standard, and the misunderstanding of the source of the fall in demand. Gold flow into the US remained positive through most of the early years of the contraction, and prices throughout the gold standard world had to fall because of the financial crisis in the US banking system. Higher tariffs lead to retaliation, negating the gold hoarding policies of high tariffs, while trade collapsed, leading to competing devaluations around the world.

A list of casualties would be long and various: A third of the banks failed. Trade contracted about 80%, construction collapsed about 80% and by 1933 one in four workers (25%) were unemployed.

What would the libertarian economists of the 70's have done differently? Milton Friedman emphasized stable money and prices. Trying to maintain steady growth in monetary aggregates would be difficult, since they were barely invented yet, and statistics were not reported quickly. In the absence of stats, commodity prices would provide a proxy for the "looseness or tightness" of monetary policy. A policy of steady internal demand would eventually run into a foreign exchange constraint, leading to devaluation or floating the dollar-- a radical departure in policy.

Friedman believed in free or freer trade. Vetoing or repealing the tariff increase would just be a start. Lowering and flattening the tariff schedule would be high on the agenda. Perhaps a Chile style flat 20%. That would have been a huge tax cut, of about half, on foreign trade, inviting a rising instead of a falling trade volume.

Friedman believed in the flat tax.  By '33 the income tax rates ranged between 4 and 63 percent, yet it produced only about 2% of national income. A 5% tax on everyone, unified with a 5% corporate tax above poverty level would have produced about the same revenue, while involving less capital flight and deadweight loss.

Needless to say, there are only a few economists today would think all those anticompetitive efforts were useful. 

Would all these changes produce expansion? I don't know, but I have a hunch.

The 12.1 percent solution?

 

Today, the government collects 12.1 % of what the IRS calls AGI (adjusted gross income). This represents about 8% of GDP.  There is room for reform there. 

The average tariff rate is 1.2 percent, yet many duties are far above that. There is room for reform there.

The trade weighted dollar has fallen dramatically, the risen dramatically, while commodity prices have risen to records, then collapsed, More room to reform.

 

More regulators, more regulations more mind numbing complexity in our dealings with the government. More new taxes and credits and subsidies, especially in energy use and production.

More panicky deals to save this or that institution, while healthy companies are taxed to aid loss making institutions. more reform here too.

What is the reforming market-freeing effort most needed today? What could be simplified,  reduced, rationalized today?

$600 Billion Worth of Payoffs?

It seems that all the spending interest groups are in Ecstasy over the prospect of a huge stimulus package coming out of washington. If $150 billion wasn't enough last spring,  the answer is that it wasn't large enough. Paul Krugman suggests a figure of $600 billion, about 4 percent of GDP. Other commentators have paraded larger piles of cash before the spending interests. "An amount of over a trillion dollars is a minimum needed for the present situation" said one commentator.

It is a tribute to human creativity that the answer to someone's debt problem is for them to spend more-- on the things that will benefit others and calling it "investment". Adding solar panels to government rooftops or insulating old folks houses may sound pleasant, but they are hardly serious answers to heavily indebted people's problems. Added highway spending may relieve congestion, or may not, but it chiefly moves economic activity around from older or unimproved routes, just as the new gas station or fast food joint takes business from the old one in a mature market. Adding a few months to the period of unemployment insurance  will help people in need, helping to feed them while they look for a job (or hold out for a better offer), but those people will not be able to pay their mortgage, since the amount can never going to be large enough.  Nor can bailing out every institution create prosperity, or even much relief, just as the take-over of the railroads and the creation of Conrail and Amtrak did not create a prosperous rail service. Using subsidies to create new "green" energy industries will just create more industries dependent upon subsidies, just as it has since Nixon's "Project Independence" some thirty-odd years ago.

The greenies need other arguments to enact their agenda. While global warming and alternative energy may be superficially popular issues, few are ready and willing to endure the sacrifices and poverty they are really demanding. This year they are envoking the spirits of two of the most corrosive ideas popular in the American political tradition -- Alexander Hamilton's infant industries argument and Keynes pothole argument.

Back when Hamilton was the first secretary of the treasury, his first message introducing the tariff included the idea that the federal government could help create new industries in the young country by giving them special preference, special protection from competition, by selective use of the tariff schedule. Critics said perhaps these industrial infants might never grow up to support themselves, once accustomed to special favors. Much of the conflict and lobbying of the next 200 years can be traced to this policy.

During the Great Depression of the 1930's, John Maynard Keynes (later Lord Keynes) became famous for the ideas express in his monumental "General Theory...." which remade economics and established many of the concepts of macroeconomics. While many of his ideas were bastardized into crude cartoons,  his basic remedy for unemployment was manic government spending, since he viewed unemployed resources as a unambiguous deadweight loss. He even stated that society would be enriched by burying pound notes and launching a scavenger hunt. Disciples spread a gospel of the free lunch and a solution to the business cycle all over the Western world. The results of this political excuse for "stimulus packages" were major and long lasting. While in 1929 the US government spent less than three percent (yes 3%) of GDP, by 1975 they were spending more than twenty percent. Since fear of recession and depression were major fears for that generation, and experience of  inflation and devaluation were not, the federal budget was balanced only rarely from 1929 to 1998 (a few years during Eisenhower).

Some Good Colombian

Matt and Maria's Adventure

Matt and Maria Birchfield packing for the "BIG TRIP"

Sometimes globalization is a mysterious force that seems to affect other people in unkown ways, raising up some businesses and governments, while punishing others. For Matt and Maria Birchfield, the process is more intense and personal. The "Other" is right at home.

Matt is a Hoosier who has lived around, mostly in the small town of Crawfordsville, IN. He has worked in a large variety of mostly blue collar jobs. He still loves his "Red-Neck" family, and has seen most of America from the cab of a Semi. His father loves his collection of guns. His mom loves those lottery tickets.

Most "blue staters" already have formed a prejudice about him by now, but of course, life defies stereotypes.



Matt loves Maria.