Tag: inflation

–When will the economy recover?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
======================================================================================================================================================================

At long last, when will the economy recover? Wait a minute. Look at this graph:

graph 1

Considering that the data only goes through September, 2010, one easily can infer that the economy already has recovered. Yes, the stock market has not recovered, but that could be good news. It could mean it still has plenty of recovery left in it.

And yes, unemployment still is a big problem:

But that could be a good thing, too (although not for those who are unemployed.) A high level of unemployment mitigates against inflation. The government could continue to use its infinite spending ability and not be concerned it was causing inflation. For instance, FICA could be eliminated, as it should be, rather than the tentative, temporary step now taken. And the standard deduction could be raised, also as it should be. And Social Security benefits could be increased, and Medicare could be expanded, again as they should be.

And interest rates have stayed way down:

graph 3

And that’s another good thing, because it means the Fed has plenty of room (not that “room” really is needed) to raise rates if inflation should rear its ugly head.

There are plenty of leading indicators one might explore, but these graphs give me cause for optimism, if only the federal government will seize the moment.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Which Taxes Are Fairest? Which Taxes are Least Fair?

The debt hawks are to economics as the creationists are to biology.

Lately, there has been more talk about revising our taxes to be more “fair.” There even is an organization that calls itself FairTax.org, which promotes a national sales tax, a first cousin to the European style value-added tax.

All federal taxes remove money from our economy, and for that reason, all federal taxes hurt our economy. Unfortunately, the belief that federal taxes are necessary (They are not) is so powerfully ingrained, it is impossible to have a rational discussion on the subject.

So we are left with repeated attempts to fix the unfixable.

Tax fairness often is confused with tax simplification.

The U.S. Tax Code contains 50 Chapters. Each chapter is divided into Sub Chapters, each of which is divided into Parts, and then into Paragraphs, all of which are subject to interpretation by Congress, the Internal Revenue Service and the courts.

Because all elements of our economy are intertwined, the interpretation of one paragraph impacts the interpretations of other paragraphs, which then require further interpretations, which impact other paragraphs and ad infinitum. Thus, our Tax Code has acquired infinite complexity, which one could argue is unfair.

Supposedly there was a king who nailed laws too high to be read, then punished those who broke the laws. Would that have been fair?

Tax complexity is inevitable. Imagine the simplest possible tax idea: Tax every man, woman and child $1,000 per year. Period. Simple enough? Fair?

How long would it be before “modifications” would be made? Reduce this tax on the poor. Increase it on the rich. Multiple definitions of “poor” and “rich.” Various payment requirements (monthly? quarterly? annually?).

Charitable deductions allowed? Do businesses pay? Definitions of “business” vs. “person.” Even the simplest possible tax idea soon will turn ever more complex and so, unfair.

The American ethic is based on “getting ahead” and on “fairness.” However, being ahead seems unfair to those who are behind.

Taxes can be levied in a variety of ways, all justifiable as “fair” and all condemned as “unfair.” For instance:

A unit tax on individuals: Each person pays the same tax (similar to an airport departure tax). This tax is fair, because it treats every individual equally. This tax is unfair, because it takes as much from the poor as from the rich.

“Sin” or luxury taxes on cigarettes, liquor, entertainment, gambling, restaurants, travel, etc. are fair, because they tax things we do not need. These taxes are unfair, because they arbitrarily designate certain items as not being needed. (Is an apple “needed?”)

FICA is fair, because the people who pay are the people who receive Social Security and Medicare. This tax is unfair, because it is a regressive tax.

Sales taxes are fair, because each person pays according to his consumption. Sales taxes are unfair, because they place a burden on low income people, who spend a greater percentage of their income and save/invest less.

Flat-rate income tax is fair, because each person pays the same rate. These taxes are unfair, because the poor cannot afford to pay as high a rate as the wealthy. They also are unfair, because some people will pay more than others.

Progressive rate income tax is fair, because high earners can afford to pay a higher rate. This tax is unfair, because even at a flat rate, higher earners would pay more. A progressive rate compounds the unfairness.

Tax on Social Security benefits is fair, because social security is just another form of income. These taxes are unfair, because income tax already was paid on Social Security deposits. It is a double tax.

Tax on Medicare benefits. See above.

Inheritance tax is fair, because wealthy families can afford to pay more. This tax is unfair, because taxes already have been paid on the assets being inherited. It is a double tax.

Personal property tax is fair, because the wealthy can afford to pay more. This tax is unfair, because taxes already have been paid on the earnings needed to acquire the assets. It is another double tax.

Tax on stock dividends is fair, because dividends are no different from any other income. This tax is unfair, because companies cannot deduct the cost and already have paid taxes on the earnings. It is one more double tax.

Taxes on corporations are fair because business should pay its share. These taxes are unfair, because they penalize workers by reducing corporations’ ability to hire and to pay salaries and benefits.

All taxes are fair and unfair, depending on whose toes are pinched. Discussions of tax fairness are sophistry, demagoguery or both. If you hear someone arguing that one federal tax is fairer while another is unfair, mark that person as a liar or a fool.

The question of federal tax fairness is not an appropriate subject for economics’ discussions. No tax is fair, and the federal government doesn’t need tax money. Perhaps the discussion is more appropriate for a psychology seminar.

If taxes are wrongly to be collected for anti-inflation purposes, the real question should be: How harmful is it to the overall economy?

In nearly all cases, the tax will be harmful. (Exceptions may be taxes collected to curtail harmful items that politically cannot be eliminated by law. These include taxes on guns, drugs, cigarettes, etc.)

I submit that the most harmful taxes tend to be those most likely to widen the Gap between the rich and the rest, i.e. the most regressive taxes.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

 

–Professor Black and the secret plot to defeat Obama

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
==============================================================================================================================================

On Monday, December 13, 2010, William Black, associate professor of economics and law at the University of Missouri-Kansas City, wrote a post on his blog, New Economic Perspectives, titled, “Obama haters praise his tax policies because they believe those policies will make him fail” (I once spoke at the UMKC, and have great respect for the professors of economics whom I met there. I still correspond with Professor Randall Wray, one of the more brilliant minds in economics.)

The thrust of Professor Black’s post was summarized in his first paragraph:

Like the Sirens reputed to lure sailors onto rocks, a series of columnists who want President Obama to fail are praising Obama’s capitulation on extending the Bush tax cuts for the wealthy. The motif of these comments has three common characteristics – all designed to destroy the Obama presidency. First, and the chutzpah of this aspect is wondrous, those that hate Obama’s policies are telling Obama he is demonstrating his strength by surrendering on the Bush tax cuts to the wealthy. Second, they claim that Obama “moved to the center” by agreeing to support tax cuts for the wealthy. Third, they claim that Obama’s attacks on his strongest supporters are brilliant politics essential to saving his Presidency.

Professor Black’s fundamental complaint was:

Obama’s promise to end the Bush tax cuts for the wealthy was supported by a strong majority of Americans. . . The people who want Obama to fail consistently push him to abandon policies that are desirable and broadly supported by the public. . .

I commented on Professor Black’s post, and the essence of my comments was:

“A couple of problems. First, because the public does not understand monetary sovereignty, and so does not understand economics, the beliefs held by the public do not necessarily constitute ‘policies that are desirable.’

“Second, increasing taxes on any group, rich or poor, removes money from the economy, and so is anti-growth. There is zero economic benefit from increasing taxes on the rich, despite the emotional satisfaction it may give the poor.

“Obama was dragged kicking and screaming into exactly the right action, i.e. he didn’t increase any taxes other than the ‘death tax,’ and that went up less than feared.

“In total, his ‘capitulation’ is predicted to give us a continuation of the Bush tax rates, a reduction in FICA and a lesser increase in the death tax. Assuming this bill passes, we will have a much better chance of exiting the recession. If that’s ‘losing|,’ I’ll take losing over winning every time.”

I was quite surprised to read Professor Black’s post. Because he teaches at UMKC, I innocently had expected he would have a better understanding of federal finance and monetary sovereignty. Perhaps, the word has not yet had time to float around the hallowed halls.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Initial results from the survey

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
========================================================================================================================
Here are a few results from a survey I ran, recently. The results demonstrate the confusion even educated people have about our economy:

All respondents agreed “the U.S. government has the power to print all the money it wants to” and half thought the federal deficit was too low. But, only half thought high taxes were a big problem. There was a logical disconnect between the government’s unlimited ability to spend money and the need for taxes.

Nearly everyone thought a “continuation or resumption of the recession” was a big problem, and only a handful thought the federal deficit was a big problem.

The majority wanted more spending on Retirement, Medical care, Education, Infrastructure, The environment and Unemployment. I was surprised that the majority wanted less spending on The military and Homeland security.

Perhaps the most interesting parts of the survey were the answers to “If I were President of the United States, this is what I would do to improve the economy.”
One person wanted to “cut the budget by 1% across all departments each year for 3 years and eliminate earmarks.” But that same person wanted more spending on medical care, education and the environment, with no change in spending on retirement, housing, business, infrastructure and unemployment.

One person wanted to end all federal taxing and borrowing, and to cut the size of the federal government to 20% of the size it is today. That person wanted less spending in all listed categories, while feeling the following problems were big: recession, state deficits, unemployment, mortgages, medical costs.

Several people wanted to end FICA along with other taxes, but some felt the federal deficit was too high.

Obviously, the results are skewed by the fact that most respondents read this blog. I was encouraged by the unanimous knowledge that the federal government has the unlimited ability to create money. So I was surprised by the common belief that taxes are necessary, especially since very few people felt inflation was a problem. (If the government can create money, and inflation is no problem, why the need for taxes?)

As I read through the comments, I was struck by one theme: Even those, who generally understand federal financing, tend to have some elements of anthropomorphic economics disease – the intuition that the federal government is like you and me. There was some“Tea Partyism” – wanting more federal spending on most projects, while wanting less government.

The debt hawks have a simple, highly intuitive model: Our own personal experience. Those who understand monetary sovereignty haven’t found such a model. So even among readers of this blog, whom one might expect to understand monetary sovereignty, the intuitive pull of personal experience is quite strong.

You can see it best while watching Congress try to stimulate the economy while limiting the only thing that can stimulate the economy: money creation.
========================================================================================================================
Response Summary

Chart1. I believe the federal deficit is:

Too low 57.7%
Too high 15.4%
About right 26.9%

Chart2. My belief about the size of the federal deficit is based on: (Indicate all that apply)

My own research 66.7%
What I learned in school 11.1%
What I hear and read in the media 33.3%
What the experts say 37.0%
What my friends say 7.4%
Other 14.8%

Chart3. Do you believe the U.S. government has the power to print all the money it wants to?

Yes, it has that power 100.0%

Chart4. How big are these problems facing the American economy.
Extremely big—–Fairly big—–Moderate or Not sure—–Not very big—–Not at all big

Continuation or resumption of the recession
63.0% 29.6% 7.4%

Federal deficit too high
7.4% 7.4% 14.8% 14.8% 51.9%

State deficits too high
37.0% 37.0% 18.5% 0.0% 7.4%

Unemployment
85.2% 14.8%

The economy has too little money
30.8% 26.9% 34.6%

Federal taxes are too high
26.9% 26.9% 15.4% 3.8% 26.9%

Too little support for the poor
38.5% 30.8% 23.1% 3.8% 3.8%

The gap between rich and poor
63.0% 14.8% 11.1% 7.4% 3.7%

Mortgages
26.9% 53.8% 15.4% 3.8%

Bank lending
15.4% 30.8% 42.3% 11.5%

Medical costs
51.9% 29.6% 11.1% 7.4%

Inflation
0.0% 7.7% 19.2% 11.5% 61.5%

Chart5. The federal government should spend on:

More than it currently spends—–About what it currently spends—– Less than it currently spends

The military
7.7% 26.9% 65.4%

Homeland security
15.4% 34.6% 50.0%

Retirement
63.0% 29.6% 7.4%

Medical care
53.8% 26.9% 19.2%

Housing
38.5% 46.2% 15.4%

Business support
30.8% 42.3% 26.9%

Education
74.1% 22.2% 3.7%

Infrastructure
85.2% 11.1% 3.7%

The environment
53.8% 30.8% 15.4%

Unemployment
74.1% 18.5% 7.4%

========================================================================================================================
If I were President of the United States, this is what I would do to improve the economy. [Selected responses]

1. suspend FICA collection
2. put people to work on infrastructure projects.
bring our troops home from all over the world.
build an network of wind-power projects, and feed them into a much upgraded national electrical grid.
facilitate a truly high-speed internet.
build a very high-speed maglev train network.
enable a national network of college-level courses that anyone could take over the internet.
3. Hugely increase spending in job creation, infrastructure, education, health care, energy R&D, heath care R&D, health and safety regulations and environmental clean up and protection.
4. First, I would institute a full payroll tax holiday, a per capita disbursement to the states, and an ELR program. Then hopefully we can begin to turn our economy around and start to reap the benifits of our real terms of trade.
5. Cut the budget by 1% across all departments each year for 3 years. Eliminate earmarks.
6. remove/eliminate payroll/FICA/medicare taxes & fund them from the general fund like everything else (great idea you have)… spend/hire billions more on DARPA, National Insitutte of Health, Medical Corps, QUADRUPLE medical schools/nursing schools/PA schools, etc to increase supply of medical personnel for increased medical demand of baby boomers & lower prices by increasing supply of medical services
and $1 TRILLION (like China is doing) on 250mph bullet trains between L.A. & Vegas, Chicago & Detroit, DC & NY, etc
7. Eliminate the payroll tax.
8. FICA holiday forever, Per capital state support, Work program.
9. End the Income Tax, Social Security Tax, and Medicare Tax. Stop borrowing our own currency. And cut the size of government to 20% of the size it is today.
10. Not too sure. Support green jobs and green infrastructure – this reduces unemployment, strengthens our infrastructure, and increases national security (moreso than a war in the Middle East would anyway). I would reduce some of the corporate welfare and unnecessary defense projects (and probably pay our soldiers more). Spend more overall, however, until the private sector picks back up.
11. Cut taxes for everyone. Fix health care, dump the current law
12. go back to the barter system.
13. Eliminate the payroll taxes
14. No taxes (including FICA) on 1st 100K of income (all sources), graduated marginal rates going up to 90% on all else. Guarantee job to anyone wanting one. Raise social security payouts by 50%. Really regulate financial sector and introduce transaction taxes
15. Cut military spending, eliminate tax cuts for rich, and dedicate more resources to meaningful stimulus packages.
16. cut taxes, increase the stimulus packages because I believe that the current stimulus is barely helping people pay off their debt and willing not increase their spending. I would seek reform of the IRS tax code(So it is not so complicated and the average American can do their own taxes), Audit and Tax the federal reserve on their income. Eliminate congressional spending to what they bring in only.
17. I would aim to catch up and overtake the Chinese in infrastructure and education. The US has to spend and tax the rich whatever it takes to achieve this. I would tell the American people that the US is in an economic war with China and is currently losing and is going to lose unless it changes course.
18. Dismantle the Tax code, make it a simple structure, a % of earnings at 4 or 5 stages (say 0% for under 30,000; 8% over 30K and under 50K; 15% over 50K and 150K; 25% over 150K and 250K & 32% over 250K. No loopholes, no deductions, no credits on anything.
19. Learn about how the govt’s role in providing money to the economy. They dont’ know how things work.
20. Tax all offshore tax haven corporate sales in USA at a higher rate than sales from US based corps and corps based in countries we have trade agreements with.
– Bring taxes on top 3% into line with Reagan or Clinton rates.
– Pass a War Tax which would go into effect automatically whenever US troops enter a foreign country for military engagement. Progressive tax, no exceptions. Exempt special ops from this tax.
– Pass a 1 trillion dollar stimulus bill.
– Disengage as quickly as possible from Afghanistan.
– Withdraw as many troops as possible from Muslim countries.
– Emphasize special ops in any future engagement, avoid ground troops. Retire most generals. keep number of generals to a smaller number.
– Increase veteran benefits, cut back on military budget by 30%.
– Fully support Head Start programs.
– Encourage savings by giving 10-20 year US bonds to all families below a certain income, add 50% on every dollar in savings accounts first year for low income people, 20% afterwards, 10% after 5 years.
– Create a federally funded, independent bond and equities rating agency. Prosecute executives and CEOs at any financial company who provides this agency with deceptive information.
21. Direct hiring program, single-payer health-care, increased taxes on rich.
========================================================================================================================
Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”