Tuesday, November 25, 2008
What About That $2,500?
...you know, the $2,500 you will save after Obama sees his proposed healthcare reforms pass. This almost inevitably will fall into the "promises likely to be broken" category. Does the healthcare system need reform? No. It needs complete overhaul, but I am highly doubtful that Obama's proposals will come even close to saving people that much money, and may even end up costing them more. Read this for more of an explanation.
Saturday, November 22, 2008
The Rich and Their Fair Share
Yes, the incomes of the wealthiest 1% account for more of a percentage of the total income in this country than they did 10 and 20 years ago. On the other hand, the percentage of all taxes they pay (income taxes, payroll taxes, etc.) has also gone up. Right now, for instance, the wealthiest earn 15.6% of total US income, and pay 27.6% of the total tax bill. Are the rich really not paying their "fair share"?
See the graph here.
See the graph here.
Friday, November 21, 2008
Should We Bailout US Automakers?
I came out in support of government action in the financial markets. I did not like some of the details of the recovery package, but in principle I believed that functioning capital markets are vital to our economy and that allowing them to fail would adversely affect everybody, much as allowing someone's house to go up in flames would negatively affect their immediate neighbors. Furthermore, I did not and do not assign total blame for this financial crisis to private mismanagement in the financial sector. Quite to the contrary, I believe the government through inappropriate types of regulation and through its political meddling in the mortgage market gave incentives to companies to lend in a reckless manner.
On the other hand, the automakers can claim no such thing. The US government has not compelled GM, Ford, and Chrysler to produce products that Americans do not buy, or to load themselves up with obligations to both current workers and retirees that they cannot afford. I am therefore firmly against any bailout for automakers. Furthermore, I find the notion of GM, Ford, and Chrysler submitting business plans for Congress to analyze (and to supposedly affirm the viability of the automakers) absurd. The only true test of success of a business plan is how the business survives in the marketplace.
Harvard economist Ed Glaesar discusses this issue at more length here.
On the other hand, the automakers can claim no such thing. The US government has not compelled GM, Ford, and Chrysler to produce products that Americans do not buy, or to load themselves up with obligations to both current workers and retirees that they cannot afford. I am therefore firmly against any bailout for automakers. Furthermore, I find the notion of GM, Ford, and Chrysler submitting business plans for Congress to analyze (and to supposedly affirm the viability of the automakers) absurd. The only true test of success of a business plan is how the business survives in the marketplace.
Harvard economist Ed Glaesar discusses this issue at more length here.
Tuesday, November 18, 2008
The Human Cost of Recessions
In today's New York Times, David Brooks discusses the disappearing middle class, or more specifically, those people who are currently in the middle class but will slide down the ladder of social mobility as the current recession deepens. Putting aside any discussion of how bad the recession will be, or what its effects will be in terms of social mobility, I find Brooks' remarks on the social cost of recessions to be insightful and something we do not often hear about.
Losing an income or a sense of economic security during an economic downturn (either a national or a personal one) is painful. Losing ties to your community and becoming socially and psychologically isolated is much worse.
Losing an income or a sense of economic security during an economic downturn (either a national or a personal one) is painful. Losing ties to your community and becoming socially and psychologically isolated is much worse.
Wednesday, November 12, 2008
Equality Under the Law vs Equality of Outcomes
From American Solutions:
"Equality under the law means that all citizens are protected by the government from the initiation of force against themselves and their property. Equality of outcomes means that the government may actively use force to balance out differences between others.
Equality under the law means that men should be judged not by the color of their skin but by the content of their character. Equality of outcomes means that skin color can be a prime factor in distinguishing between individuals.
Equality under the law is about equal rights, meaning the protections that ensure an individual’s liberty and security. Equality of outcomes perverts the notion of rights to give some citizens a claim on the rights of others.
Despite being backed by “good intentions”, equality of outcomes is as much a threat American liberty as enforced segregation or hereditary aristocracy. All of these ideas suffer from the same vice – they fail to administer identical standards of justice to all citizens.
Equality under the law does not endorse wide divergences in social conditions. It does not support a growing gap between rich and poor. In fact, valuing equality under the law is often one of the best means of closing such gaps, precisely because attempts to mandate equality of outcomes often end up being counter-productive and hurting the people they intend to help. The point, however, is that equality under the law is not designed to guarantee economic and political conditions but rather to protect economic and political freedoms. It recognizes that human beings are different and that objective standards must therefore allow for different results amongst them. Equality under the law ultimately means that all citizens are treated with respect and dignity as free individuals with equal rights."
Monday, November 10, 2008
12% Unemployment?!
Considering that the recent unemployment data puts us at 6.5%, it would appear that we are not even close. However, what about all of those people who quit looking for jobs because they could not find anything, but are willing and eager to work? What about those people who would like a full-time job but have had to settle for a part-time job? The Bureau of Labor Statistics also creates an alternative unemployment rate number that takes these into account. The current unemployment rate? 11.8%.
Sunday, November 9, 2008
An Obama Mandate?
I find it amusing to watch the political pundits and commentators debating over whether or not Obama has been given a mandate, and what the nature of such a mandate may be. Are we ushering in a new era of political "progressivism." Sure we are, just as much as we ushered in a permanent Republican majority in 2004.
The truth is that people do not vote en masse based on ideologies. Most people do not even have a political ideology, let alone vote based on one. People vote based on how well they think each candidate addresses the concerns that they and their peers have for the country, and how well those solutions presented comport with their sensibilities.
Even ignoring Obama's political acumen, it is clear from the past 2 years that conservatives have failed to even address in any serious manner some of the major concerns that Americans are having-- rising college and healthcare costs, a polarization of incomes coupled with stagnating middle incomes, and diminishing job security. When conservatives do not sit at the table for the discussion, then the opposition wins the argument by default. The only way we are guaranteed to enter into an era of progressive hegemony is if conservatives insist on no more than buckling down and being more pure versions of their 1980's selves while ignoring the concerns of the people who actually vote.
Rich Lowry discusses this in more detail. It is a very insightful article. To read, go here.
The truth is that people do not vote en masse based on ideologies. Most people do not even have a political ideology, let alone vote based on one. People vote based on how well they think each candidate addresses the concerns that they and their peers have for the country, and how well those solutions presented comport with their sensibilities.
Even ignoring Obama's political acumen, it is clear from the past 2 years that conservatives have failed to even address in any serious manner some of the major concerns that Americans are having-- rising college and healthcare costs, a polarization of incomes coupled with stagnating middle incomes, and diminishing job security. When conservatives do not sit at the table for the discussion, then the opposition wins the argument by default. The only way we are guaranteed to enter into an era of progressive hegemony is if conservatives insist on no more than buckling down and being more pure versions of their 1980's selves while ignoring the concerns of the people who actually vote.
Rich Lowry discusses this in more detail. It is a very insightful article. To read, go here.
Mark Steyn is Less Optimistic
Here is an excerpt:
"If you went back to the end of the 19th century and suggested to, say, William McKinley that one day Americans would find themselves choosing between a candidate promising to guarantee your mortgage and a candidate promising to give "tax cuts" to millions of people who pay no taxes he would scoff at you for concocting some patently absurd H.G. Wells dystopian fantasy. Yet it happened. Slowly, remorselessly, government metastasized to the point where it now seems entirely normal for Peggy Joseph of Sarasota, Fla., to vote for Obama because "I won't have to worry about putting gas in my car. I won't have to worry about paying my mortgage."
While few electorates consciously choose to leap left, a couple more steps every election, and eventually societies reach a tipping point. In much of the West, it's government health care. It changes the relationship between state and citizen into something closer to pusher and junkie. Henceforth, elections are fought over which party is proposing the shiniest government bauble: If you think President-elect Obama's promise of federally subsidized day care was a relatively peripheral part of his platform, in Canada in the election before last it was the dominant issue. Yet America may be approaching its tipping point even more directly. In political terms, the message of the gazillion-dollar bipartisan bailout was a simple one: "Individual responsibility" and "self-reliance" are for chumps. If Goldman Sachs and AIG and Bear Stearns are getting government checks to "stay in their homes" (and boardrooms, and luxury corporate retreats), why shouldn't Peggy Joseph?
I don't need Barack Obama's help to "spread the wealth around." I spread my wealth around every time I hire somebody, expand my business, or just go to the general store and buy a quart of milk and loaf of bread. As far as I know, only one bloated plutocrat declines to spread his wealth around, and that's Scrooge McDuck, whose principal activity in Disney cartoons was getting into his little bulldozer and plowing back and forth over a mountain of warehoused gold and silver coins. Don't know where he is these days. On the board at Halliburton, no doubt. But most of the beleaguered band of American capitalists do not warehouse their wealth in McDuck fashion. It's not a choice between hoarding and spreading, but a choice between who spreads it best: an individual free to make his own decisions about investment and spending, or Barney Frank. I don't find that a difficult question to answer. More to the point, put Barney & Co. in charge of the spreading, and there'll be a lot less to spread.
I disagree with my fellow conservatives who think the Obama-Pelosi-Reid-Frank liberal behemoth will so obviously screw up that they'll be routed in two or four years' time. The president-elect's so-called "tax cut" will absolve 48 percent of Americans from paying any federal income tax at all, while those who are left will pay more. Just under half the population will be, as Daniel Henninger pointed out in The Wall Street Journal, on the dole.
By 2012, it will be more than half on the dole, and this will be an electorate where the majority of the electorate will be able to vote itself more lollipops from the minority of their compatriots still dumb enough to prioritize self-reliance, dynamism and innovation over the sedating cocoon of the Nanny State. That is the death of the American idea – which, after all, began as an economic argument: "No taxation without representation" is a great rallying cry. "No representation without taxation" has less mass appeal. For how do you tell an electorate living high off the entitlement hog that it's unsustainable, and you've got to give some of it back?""
"If you went back to the end of the 19th century and suggested to, say, William McKinley that one day Americans would find themselves choosing between a candidate promising to guarantee your mortgage and a candidate promising to give "tax cuts" to millions of people who pay no taxes he would scoff at you for concocting some patently absurd H.G. Wells dystopian fantasy. Yet it happened. Slowly, remorselessly, government metastasized to the point where it now seems entirely normal for Peggy Joseph of Sarasota, Fla., to vote for Obama because "I won't have to worry about putting gas in my car. I won't have to worry about paying my mortgage."
While few electorates consciously choose to leap left, a couple more steps every election, and eventually societies reach a tipping point. In much of the West, it's government health care. It changes the relationship between state and citizen into something closer to pusher and junkie. Henceforth, elections are fought over which party is proposing the shiniest government bauble: If you think President-elect Obama's promise of federally subsidized day care was a relatively peripheral part of his platform, in Canada in the election before last it was the dominant issue. Yet America may be approaching its tipping point even more directly. In political terms, the message of the gazillion-dollar bipartisan bailout was a simple one: "Individual responsibility" and "self-reliance" are for chumps. If Goldman Sachs and AIG and Bear Stearns are getting government checks to "stay in their homes" (and boardrooms, and luxury corporate retreats), why shouldn't Peggy Joseph?
I don't need Barack Obama's help to "spread the wealth around." I spread my wealth around every time I hire somebody, expand my business, or just go to the general store and buy a quart of milk and loaf of bread. As far as I know, only one bloated plutocrat declines to spread his wealth around, and that's Scrooge McDuck, whose principal activity in Disney cartoons was getting into his little bulldozer and plowing back and forth over a mountain of warehoused gold and silver coins. Don't know where he is these days. On the board at Halliburton, no doubt. But most of the beleaguered band of American capitalists do not warehouse their wealth in McDuck fashion. It's not a choice between hoarding and spreading, but a choice between who spreads it best: an individual free to make his own decisions about investment and spending, or Barney Frank. I don't find that a difficult question to answer. More to the point, put Barney & Co. in charge of the spreading, and there'll be a lot less to spread.
I disagree with my fellow conservatives who think the Obama-Pelosi-Reid-Frank liberal behemoth will so obviously screw up that they'll be routed in two or four years' time. The president-elect's so-called "tax cut" will absolve 48 percent of Americans from paying any federal income tax at all, while those who are left will pay more. Just under half the population will be, as Daniel Henninger pointed out in The Wall Street Journal, on the dole.
By 2012, it will be more than half on the dole, and this will be an electorate where the majority of the electorate will be able to vote itself more lollipops from the minority of their compatriots still dumb enough to prioritize self-reliance, dynamism and innovation over the sedating cocoon of the Nanny State. That is the death of the American idea – which, after all, began as an economic argument: "No taxation without representation" is a great rallying cry. "No representation without taxation" has less mass appeal. For how do you tell an electorate living high off the entitlement hog that it's unsustainable, and you've got to give some of it back?""
An Economic Perspective from FedEx
Or, more accurately, Fred Smith, the CEO of FedEx:
"Fred Smith is in an agitated state. He's just returned from a Washington Redskins game -- played in FedEx field in Washington -- and the team has been upset by the St. Louis Rams. "It was just awful," he grouses. "My son's one of the coaches, and he was ready to jump off the ledge of the stadium."
There are few better people to ask about our current economic precipice than Mr. Smith -- or, as some people call him, "Fred Ex." His company has $38 billion in sales, employs four football stadiums full of workers, owns 300 jet airplanes, and tens of thousands of trucks and vehicles. FedEx moves an incomprehensible seven million packages each day to every corner of the globe. And the good news is that Fred is optimistic -- sort of.
Ismael Roldan
"Oh, the country is going to get through this and the financial markets will stabilize," he assures me, but only after we go through a period of "trauma and readjustment."
I ask him just what he means by "trauma." He attributes the financial crisis to "the intersection of four long-term developments." Reckless mortgage lending policies; high energy prices; mark-to-market accounting rules; and national policies that favor what he calls "the financial sector over the industrial sector."
"Rather than in our business where you have to have a dollar of equity for, 10 cents or 15 cents of debt," he explains, "it's exactly the opposite in the financial sector where you have one dollar of equity for 10, 25, 50 times risk." "Things became so flipped upside down," he explains, that "the assets at these banks became the liabilities and the liabilities became the assets. These people were making these fantastic returns -- at places like Fannie Mae and Freddie Mac -- but in reality they weren't adding a lot of value. I have said time and again that there is a fundamental tendency in good times in the financial sector to over-leverage. Our national policies actively encouraged all this debt."
How so? "The United States has a completely uncompetitive tax structure in general and it has a particularly onerous tax structure for firms that are asset-intensive. If you run an industrial company like FedEx, which employs 290,000 folks, most of whom are blue-collar people, the way we have to run this business is to equip those workers with billions of dollars of assets that allow them to pick up and deliver millions of things around the world."
His theory is that the tax bias against capital explains why so much top U.S. talent got whisked off to become investment bankers. "Not too many young people coming out of school are studying to be production managers at General Motors." He says that most of FedEx's first line managers come not from the top flight universities, but out of community colleges and the military. "The top talent has wanted to go to Wall Street."
He has come to hold the get-rich-quick Wall Street financiers in more than a little disdain. He views the heroes of the U.S. economy as the companies that actually produce real goods and services. He sees the Wall Street collapse as an inevitable byproduct of investment bankers building multitrillion dollar debt pyramid structures.
So how do we fix this problem and retool our industrial sector in a pro-competitive fashion? "We've got to reduce the taxes on equity. Let companies expense their capital purchases."
He uses an example from FedEx. "Look, our capital budget as we went into this year was about $3 billion. We went out to Boeing in July for our board meeting to see the new triple seven, [the Boeing 777] which we have bought. If we had a lower corporate tax rate with the ability to expense capital expenditures, guess what? We'd buy more triple sevens. We absolutely have to cut the corporate tax. Our current tax rate is about 38%. Even Germany has a 25% rate."
We turn to the election. Mr. Smith is one of the most enthusiastic supporters of John McCain among the Fortune 50 CEOs. When I ask why, he says instantly: "Because I agree with him on trade, taxes, energy and health care."
Next I ask Mr. Smith about the class warfare theme of the political debate. "The politicians deplore the fact that we have a disparity of income," he says, but "the only way to make a blue-collar person earn more is to invest in capital, training and infrastructure. So the more you tax capital, the more you hurt workers." He estimates that about 70% of the return from FedEx capital expenditures is captured by workers in the form of higher wages as their productivity rises.
He sees a big problem in that so few Americans now pay any income tax. "We're now at a point where a very large part of the population pays no federal income tax at all. When you have a majority of the population that realizes that you can transfer money from the productive to themselves, that's one of the great questions for the future of civilization, as far as I'm concerned."
As for CEO pay, Mr. Smith concedes that in some cases corporate management pay scales have gotten far out of line with shareholder interests. But he is quick to add: "I don't think anybody begrudges somebody making a large amount of money as long as it benefits everyone else. The problem is when they make a large amount of money and the shareholders get clobbered." As he sees it, "There's only one solution, and that is for a competent board of directors to oversee managers and give them incentives which are long-term in nature and which are irrevocably tied to the fortunes of the shareholders."
I tour the FedEx command and control center outside the Memphis airport. It's an awesome sight. FedEx operates its own air traffic control system and its own weather monitoring services. It takes over whole airports at night, and it operates its own risk mitigation operation to prepare for every possible contingency. "We have to know instantly how we reroute our planes if that storm in Tulsa turns into a tornado," the operations manager explains. There's a massive screen covering an entire wall that monitors the location and progress of every FedEx plane in the sky.
The computer technicians show me a jaw-dropping display on the computer screen of a fast-motion day of FedEx plane travel. Starting in the wee hours of the morning, the planes descend from all over the country into the Memphis airport. A few hours later, after being loaded with packages, the jets begin their assault on the major cities of the nation and world. They call this the "ant farm," because it resembles armies of ants scurrying to every corner of the globe. This is a company that has staked its entire reputation on getting packages to their appointed destination, "absolutely, positively overnight."
I keep thinking how many tens of billions of dollars Uncle Sam would save if it were one-third this efficient. These are the people that should have been in charge of the rescue operation during Hurricane Katrina. "We got all our people out -- no problem," Mr. Smith tells me.
Considering FedEx's world-wide operations, and its rapid expansion in China, it occurs to me that there is perhaps no other company in the world more dependent on international trade. Sure enough, Fred Smith is a fanatical supporter of free trade. So much so that he says, "I think the best thing the United States could do is to unilaterally disarm. It should open up markets. The agricultural subsidies are terrible. They're just immoral."
On economic grounds, he continues, "I think the history is very clear, that trade is the main reason that the world has enjoyed the prosperity. Look at China. They've drug hundreds of millions of people out of poverty through trade."
Trade aside, no issue is of greater consequence to FedEx than energy policy. FedEx consumes 1.3 billion gallons of jet fuel a year, and is the largest user of energy in the world next to the U.S. military. Mr. Smith sits on the board of the Energy Security Leadership Council, which issued a report a few months ago advocating a huge expansion of domestic energy supply. How do we do this?
"Two things," he insists. "The first is we should maximize oil production in the United States in every respect. Everything, offshore, Alaska, shale, nonconventional, coal to liquid, gas to liquid, and nuclear. Let the market work.
"Second, and this is where I am an apostate on the free market, and also where I disagree in the main with, with Boone Pickens," Mr. Smith adds. "The United States has only one real way to reduce our dependence on foreign petroleum, in terms of reducing demand while we're increasing our domestic supply, and that is to electrify the short haul transportation system, to go to battery powered cars. The technology that brought us laptops and cell phones has reached a point where these lithium ion batteries can now produce cars like the Chevy Volt and the new plug-in Toyota Prius." Many FedEx trucks are already using this technology, though he admits they aren't yet cost efficient but are 42% more fuel efficient.
Mr. Smith ends our interview with a little sermon about what the U.S. must do to retain its global economic superpower status. "Many of our current policies are not conducive to continued economic leadership. We restrict immigration when we have thousands of highly educated people that want to come to the United States, and some of our greatest corporations [are] crying out that we don't have the scientific talent that we need to develop the next generation of innovations and inventions . . .
"That's where all wealth comes from . . . It's not from the government. It's from invention and entrepreneurship and innovation. And our policies promote a legal and regulatory system which impedes our ability to grow entrepreneurship. Lastly, if we want to make [America's workers] wealthier we have to quit demonizing quote, big corporations."
As I walk out the door I ask Mr. Smith if he's communicated these ideas directly to Barack Obama. "I haven't met Barack Obama," he replies. "He's certainly a charismatic fellow and well-spoken. I just disagree with him on trade and taxes and energy and health care.""
"Fred Smith is in an agitated state. He's just returned from a Washington Redskins game -- played in FedEx field in Washington -- and the team has been upset by the St. Louis Rams. "It was just awful," he grouses. "My son's one of the coaches, and he was ready to jump off the ledge of the stadium."
There are few better people to ask about our current economic precipice than Mr. Smith -- or, as some people call him, "Fred Ex." His company has $38 billion in sales, employs four football stadiums full of workers, owns 300 jet airplanes, and tens of thousands of trucks and vehicles. FedEx moves an incomprehensible seven million packages each day to every corner of the globe. And the good news is that Fred is optimistic -- sort of.
Ismael Roldan
"Oh, the country is going to get through this and the financial markets will stabilize," he assures me, but only after we go through a period of "trauma and readjustment."
I ask him just what he means by "trauma." He attributes the financial crisis to "the intersection of four long-term developments." Reckless mortgage lending policies; high energy prices; mark-to-market accounting rules; and national policies that favor what he calls "the financial sector over the industrial sector."
"Rather than in our business where you have to have a dollar of equity for, 10 cents or 15 cents of debt," he explains, "it's exactly the opposite in the financial sector where you have one dollar of equity for 10, 25, 50 times risk." "Things became so flipped upside down," he explains, that "the assets at these banks became the liabilities and the liabilities became the assets. These people were making these fantastic returns -- at places like Fannie Mae and Freddie Mac -- but in reality they weren't adding a lot of value. I have said time and again that there is a fundamental tendency in good times in the financial sector to over-leverage. Our national policies actively encouraged all this debt."
How so? "The United States has a completely uncompetitive tax structure in general and it has a particularly onerous tax structure for firms that are asset-intensive. If you run an industrial company like FedEx, which employs 290,000 folks, most of whom are blue-collar people, the way we have to run this business is to equip those workers with billions of dollars of assets that allow them to pick up and deliver millions of things around the world."
His theory is that the tax bias against capital explains why so much top U.S. talent got whisked off to become investment bankers. "Not too many young people coming out of school are studying to be production managers at General Motors." He says that most of FedEx's first line managers come not from the top flight universities, but out of community colleges and the military. "The top talent has wanted to go to Wall Street."
He has come to hold the get-rich-quick Wall Street financiers in more than a little disdain. He views the heroes of the U.S. economy as the companies that actually produce real goods and services. He sees the Wall Street collapse as an inevitable byproduct of investment bankers building multitrillion dollar debt pyramid structures.
So how do we fix this problem and retool our industrial sector in a pro-competitive fashion? "We've got to reduce the taxes on equity. Let companies expense their capital purchases."
He uses an example from FedEx. "Look, our capital budget as we went into this year was about $3 billion. We went out to Boeing in July for our board meeting to see the new triple seven, [the Boeing 777] which we have bought. If we had a lower corporate tax rate with the ability to expense capital expenditures, guess what? We'd buy more triple sevens. We absolutely have to cut the corporate tax. Our current tax rate is about 38%. Even Germany has a 25% rate."
We turn to the election. Mr. Smith is one of the most enthusiastic supporters of John McCain among the Fortune 50 CEOs. When I ask why, he says instantly: "Because I agree with him on trade, taxes, energy and health care."
Next I ask Mr. Smith about the class warfare theme of the political debate. "The politicians deplore the fact that we have a disparity of income," he says, but "the only way to make a blue-collar person earn more is to invest in capital, training and infrastructure. So the more you tax capital, the more you hurt workers." He estimates that about 70% of the return from FedEx capital expenditures is captured by workers in the form of higher wages as their productivity rises.
He sees a big problem in that so few Americans now pay any income tax. "We're now at a point where a very large part of the population pays no federal income tax at all. When you have a majority of the population that realizes that you can transfer money from the productive to themselves, that's one of the great questions for the future of civilization, as far as I'm concerned."
As for CEO pay, Mr. Smith concedes that in some cases corporate management pay scales have gotten far out of line with shareholder interests. But he is quick to add: "I don't think anybody begrudges somebody making a large amount of money as long as it benefits everyone else. The problem is when they make a large amount of money and the shareholders get clobbered." As he sees it, "There's only one solution, and that is for a competent board of directors to oversee managers and give them incentives which are long-term in nature and which are irrevocably tied to the fortunes of the shareholders."
I tour the FedEx command and control center outside the Memphis airport. It's an awesome sight. FedEx operates its own air traffic control system and its own weather monitoring services. It takes over whole airports at night, and it operates its own risk mitigation operation to prepare for every possible contingency. "We have to know instantly how we reroute our planes if that storm in Tulsa turns into a tornado," the operations manager explains. There's a massive screen covering an entire wall that monitors the location and progress of every FedEx plane in the sky.
The computer technicians show me a jaw-dropping display on the computer screen of a fast-motion day of FedEx plane travel. Starting in the wee hours of the morning, the planes descend from all over the country into the Memphis airport. A few hours later, after being loaded with packages, the jets begin their assault on the major cities of the nation and world. They call this the "ant farm," because it resembles armies of ants scurrying to every corner of the globe. This is a company that has staked its entire reputation on getting packages to their appointed destination, "absolutely, positively overnight."
I keep thinking how many tens of billions of dollars Uncle Sam would save if it were one-third this efficient. These are the people that should have been in charge of the rescue operation during Hurricane Katrina. "We got all our people out -- no problem," Mr. Smith tells me.
Considering FedEx's world-wide operations, and its rapid expansion in China, it occurs to me that there is perhaps no other company in the world more dependent on international trade. Sure enough, Fred Smith is a fanatical supporter of free trade. So much so that he says, "I think the best thing the United States could do is to unilaterally disarm. It should open up markets. The agricultural subsidies are terrible. They're just immoral."
On economic grounds, he continues, "I think the history is very clear, that trade is the main reason that the world has enjoyed the prosperity. Look at China. They've drug hundreds of millions of people out of poverty through trade."
Trade aside, no issue is of greater consequence to FedEx than energy policy. FedEx consumes 1.3 billion gallons of jet fuel a year, and is the largest user of energy in the world next to the U.S. military. Mr. Smith sits on the board of the Energy Security Leadership Council, which issued a report a few months ago advocating a huge expansion of domestic energy supply. How do we do this?
"Two things," he insists. "The first is we should maximize oil production in the United States in every respect. Everything, offshore, Alaska, shale, nonconventional, coal to liquid, gas to liquid, and nuclear. Let the market work.
"Second, and this is where I am an apostate on the free market, and also where I disagree in the main with, with Boone Pickens," Mr. Smith adds. "The United States has only one real way to reduce our dependence on foreign petroleum, in terms of reducing demand while we're increasing our domestic supply, and that is to electrify the short haul transportation system, to go to battery powered cars. The technology that brought us laptops and cell phones has reached a point where these lithium ion batteries can now produce cars like the Chevy Volt and the new plug-in Toyota Prius." Many FedEx trucks are already using this technology, though he admits they aren't yet cost efficient but are 42% more fuel efficient.
Mr. Smith ends our interview with a little sermon about what the U.S. must do to retain its global economic superpower status. "Many of our current policies are not conducive to continued economic leadership. We restrict immigration when we have thousands of highly educated people that want to come to the United States, and some of our greatest corporations [are] crying out that we don't have the scientific talent that we need to develop the next generation of innovations and inventions . . .
"That's where all wealth comes from . . . It's not from the government. It's from invention and entrepreneurship and innovation. And our policies promote a legal and regulatory system which impedes our ability to grow entrepreneurship. Lastly, if we want to make [America's workers] wealthier we have to quit demonizing quote, big corporations."
As I walk out the door I ask Mr. Smith if he's communicated these ideas directly to Barack Obama. "I haven't met Barack Obama," he replies. "He's certainly a charismatic fellow and well-spoken. I just disagree with him on trade and taxes and energy and health care.""
Friday, November 7, 2008
Thursday, November 6, 2008
The Danger of Taxes That Are...Too Low?
From Jonah Goldberg:
"Both Obama and McCain have a tendency to see villainy as an explanation for our economic woes. Obama thinks opposing tax increases is unneighborly and selfish. McCain has a long habit of denouncing Wall Street “greed.”One moral hazard of such attitudes is that the investor class will start applying its entrepreneurial skills to protecting its existing wealth from the tax collector rather than trying to create more wealth.But the greater danger is that millions of Americans might believe that all that is keeping them from the good life is the tightfistedness of people doing better than them and a government unwilling to pry those wealthy fingers open. That’s a recipe for an unhealthy political culture.A sane tax code, under any president, would be simple, clear and direct. We’re not going to give up on redistribution in the form of, say, the earned income tax credit. But it’s important that the working and middle classes feel as if government spending comes out of their wallets, too. Otherwise, the line between citizen and subject is blurred and the costs of government are seen as someone else’s problem."
"Both Obama and McCain have a tendency to see villainy as an explanation for our economic woes. Obama thinks opposing tax increases is unneighborly and selfish. McCain has a long habit of denouncing Wall Street “greed.”One moral hazard of such attitudes is that the investor class will start applying its entrepreneurial skills to protecting its existing wealth from the tax collector rather than trying to create more wealth.But the greater danger is that millions of Americans might believe that all that is keeping them from the good life is the tightfistedness of people doing better than them and a government unwilling to pry those wealthy fingers open. That’s a recipe for an unhealthy political culture.A sane tax code, under any president, would be simple, clear and direct. We’re not going to give up on redistribution in the form of, say, the earned income tax credit. But it’s important that the working and middle classes feel as if government spending comes out of their wallets, too. Otherwise, the line between citizen and subject is blurred and the costs of government are seen as someone else’s problem."
The Danger of Taxes That Are...Too Low?
From Jonah Goldberg
"Both Obama and McCain have a tendency to see villainy as an explanation for our economic woes. Obama thinks opposing tax increases is unneighborly and selfish. McCain has a long habit of denouncing Wall Street “greed.”One moral hazard of such attitudes is that the investor class will start applying its entrepreneurial skills to protecting its existing wealth from the tax collector rather than trying to create more wealth.But the greater danger is that millions of Americans might believe that all that is keeping them from the good life is the tightfistedness of people doing better than them and a government unwilling to pry those wealthy fingers open. That’s a recipe for an unhealthy political culture.A sane tax code, under any president, would be simple, clear and direct. We’re not going to give up on redistribution in the form of, say, the earned income tax credit. But it’s important that the working and middle classes feel as if government spending comes out of their wallets, too. Otherwise, the line between citizen and subject is blurred and the costs of government are seen as someone else’s problem."
Avoiding a Return to Paternalism
These are difficult times. People feel insecure about their future, and indeed their present, and are clamoring for a reassuring, if not a helping hand. This is all well and good, and understandable. However, satisfying this desire through a return to paternalistic policies would have disastrous long-term consequences. Read this from Michael Beran:
"Particular emergencies require energetic government, and there are times when people need a helping hand. President-elect Obama’s challenge will be to find ways to give people that helping hand without raising up massive and all but ineradicable bureaucracies that degrade the human spirit by taking away from citizens decisions they must make for themselves, and by insulating them from the consequences of their actions.It won’t be easy. When times are hard it is tempting to imagine that supervisory agencies with wide discretionary powers can solve our problems for us and deliver, deus ex machina, the prosperity we seek. In the long run, however, it is the initiative of free people that solves problems and improves the quality of life. Exaggerated rhetoric about the failure of free markets should not be permitted to obscure that basic truth. Freedom works because it liberates the human spirit and removes barriers to achievement. Paternalism doesn’t work because over time it turns too many citizens into helpless wards of the state — a sub-caste permanently unequal to the challenge of life — and puts obstacles in the way of other citizens whose productive energies are taxed in order to pay for the chandala class’s upkeep.If he is to succeed in the White House, President-Elect Obama needs to promote, through his policies, the principle of equality his own election so signally confirmed. He must find a way to address the current discontents without returning to paternalist policies that will jeopardize an ideal of which he himself is one of history’s most striking embodiments."
"Particular emergencies require energetic government, and there are times when people need a helping hand. President-elect Obama’s challenge will be to find ways to give people that helping hand without raising up massive and all but ineradicable bureaucracies that degrade the human spirit by taking away from citizens decisions they must make for themselves, and by insulating them from the consequences of their actions.It won’t be easy. When times are hard it is tempting to imagine that supervisory agencies with wide discretionary powers can solve our problems for us and deliver, deus ex machina, the prosperity we seek. In the long run, however, it is the initiative of free people that solves problems and improves the quality of life. Exaggerated rhetoric about the failure of free markets should not be permitted to obscure that basic truth. Freedom works because it liberates the human spirit and removes barriers to achievement. Paternalism doesn’t work because over time it turns too many citizens into helpless wards of the state — a sub-caste permanently unequal to the challenge of life — and puts obstacles in the way of other citizens whose productive energies are taxed in order to pay for the chandala class’s upkeep.If he is to succeed in the White House, President-Elect Obama needs to promote, through his policies, the principle of equality his own election so signally confirmed. He must find a way to address the current discontents without returning to paternalist policies that will jeopardize an ideal of which he himself is one of history’s most striking embodiments."
The Vanishing Republican Voter
David Frum contends that the trend toward increasing income inequality, coupled with middle-class income stagnation and uncontrolled healthcare inflation, are leading to the collapse of the Republican party because the party refuses to address those issues. It is an interesting read. To read, click here.
What Conservatives Should Do
I will address the topic specifically in my own terms in the near future, but until then, I whole-heartedly agree with the following article from Jim Manzi:
"What should the GOP, and the conservative movement more generally, be concentrating on for the next few years? Developing, demonstrating, and communicating solutions to the current problems of the middle class.
Most conservatives who propose a return to "Reagan conservatism" don't understand either the motivations or structure of the Reagan economic revolution. The 1970s were a period of economic crisis for America as it emerged from global supremacy to a new world of real economic competition. The Reagan economic strategy for meeting this challenge was sound money plus deregulation, broadly defined. It succeeded, but it exacerbated a number of pre-existing trends that began or accelerated in the '70s that tended to increase inequality.
International competition is now vastly more severe than it was 30 years ago. The economic rise of the Asian heartland is the fundamental geostrategic fact of the current era. In aggregate, America is rich and economically successful but increasingly unequal, with a stagnating middle class. If we give up the market-based reforms that allow us to prosper, we will lose by eventually allowing international competitors to defeat us. But if we let inequality grow unchecked, we will lose by eventually hollowing out the middle class and threatening social cohesion. This rock-and-a-hard-place problem, not some happy talk about the end of history, is what "globalization" means for the United States.
Seen in this light, the challenge in front of conservatives is clear: How do we continue to increase the market orientation of the American economy while helping more Americans to participate in it more equally?
Here are two ideas among many.First, improve K-12 schools. U.S. public schools are in desperate need of improvement and have been for decades. We do not prepare the average American child to succeed versus international competition. Schools can do only so much to fix this—in a nation where 37 percent of births are out-of-wedlock, many children will be left behind—but it would be a great start if the average school didn't go out of its way to make kids lazy and stupid.
No amount of money or number of "programs" will create anything more than marginal improvements, because public schools are organized to serve teachers and administrators rather than students and families. We need, at least initially, competition for students among public schools in which funding moves with students and in which schools are far freer to change how they operate. As we have seen in the private economy, only markets will force the unpleasant restructuring necessary to unleash potential. Conservatives have long had this goal but are unprepared to win the fight. Achieving it would be at least a decade-long project.
The role of the federal government could be limited but crucial. Suppose it established a comprehensive national exam by grade level to be administered by all schools and universities that receive any federal money and required each school to publish all results, along with other detailed data about school budgets, performance, and so forth each year. Secondary, profit-driven information providers, analogous to credit-rating agencies and equity analysts, would arise to inform decision-making. The federal role would be very much like that of the Securities and Exchange Commission for equity markets: to ensure that each school published accurate, timely, and detailed data. This would not only improve schools in the aggregate but also serve to provide a more realistic path of economic advancement to anybody with a reasonably responsible family and help to acculturate more Americans to a market economy. This would also become a model for other reform of entitlement programs, from retirement accounts to medial care.
Second, reconsider immigration policy. What if, once we had control of our southern border, we came to view the goal of immigration policy as recruiting instead of law enforcement? Once we established a target number of immigrants per year, we could set up recruiting offices looking for the best possible talent everywhere from Beijing to Helsinki. It would be great for America as a whole to have, say, 500,000 very smart, motivated people move here each year with the intention of becoming citizens. It would also do wonders for equality if they were not almost all desperately poor, unskilled, and competing with already low-wage workers.
Other examples of policies that can raise competitiveness and lower inequality, ranging from reduced small-business regulation to allowing individuals tax deductibility for private health care purchases to automatic (with an opt-out) enrollment for 401(k) plans, become obvious once you start to look for them. What they tend to have in common is a focus on building human capital and effective market institutions. That is, they build the key resources of the new economy.
The conservative movement has become excessively dogmatic and detached from realities on the ground. It needs to become more empirical and practical—which strike me as traditionally conservative attitudes."
Wednesday, November 5, 2008
A Prayer for Obama
As Christians, we need to remember that God is the one that empowers our leaders and allows them to be in their position. Therefore, regardless of the many disagreements I have with President-elect Obama's governing philosophy and worldview, I have to recognize that God has chosen him for this time and this place for reasons of His own. Because of that, and for the health of the nation, we should pray for the new President. The following is from a Christian blog:
Our prayer today, Our Father, is for President-Elect Barack Obama.
Our prayers include:
That You, the infinite font of wisdom, might grant him wisdom daily.
That You, the loving God of all, might grant him love for you and for others, including our enemies.
That You, the holy and righteous God of justice, might empower him to do what is right in all that he does.
That You, the Lord, might grant him the charisma of insight to lead in this turbulent world and time.
That You, the Healer, might grant him the grace of reconciling damaged relations in this country and in the world about us.
That You, the God of Life, might grant him a commitment to act for all -- the unborn and born, the young and old, the civilian and the soldier -- to preserve life and honor that each of us is fashioned in the image of God.
That You, the Father, might grant him the time and wisdom to father his two young daughters and love Michelle, his wife.
And that You, the God of all comfort, might grace him and his family as they mourn the loss of his grandmother.
Lord, hear our prayer.
Through Christ our Lord, who lives and reigns with you and the Holy Spirit, one God, forever and ever. Amen.
Our prayer today, Our Father, is for President-Elect Barack Obama.
Our prayers include:
That You, the infinite font of wisdom, might grant him wisdom daily.
That You, the loving God of all, might grant him love for you and for others, including our enemies.
That You, the holy and righteous God of justice, might empower him to do what is right in all that he does.
That You, the Lord, might grant him the charisma of insight to lead in this turbulent world and time.
That You, the Healer, might grant him the grace of reconciling damaged relations in this country and in the world about us.
That You, the God of Life, might grant him a commitment to act for all -- the unborn and born, the young and old, the civilian and the soldier -- to preserve life and honor that each of us is fashioned in the image of God.
That You, the Father, might grant him the time and wisdom to father his two young daughters and love Michelle, his wife.
And that You, the God of all comfort, might grace him and his family as they mourn the loss of his grandmother.
Lord, hear our prayer.
Through Christ our Lord, who lives and reigns with you and the Holy Spirit, one God, forever and ever. Amen.
Change We Actually Can Believe In
From economist Tom Cooley:
"After a long, hard fought and history-making campaign, Barack Obama is the president-elect. There is great joy throughout America and the world at the election of this thoughtful man as our first black president. Now that the grinding political process is behind us, he is free to reshape his campaign sound bites into presidential policies that will deliver the real change he promised.
And here, I start to dream…
In a bold departure from campaign rhetoric aimed at comforting disaffected rust-belt voters, Mr. Obama is now able to affirm his commitment to free trade and the process of globalization. Importantly, informed by his University of Chicago and Harvard-based economic advisers, he has underscored his support for the North American Free Trade Agreement, to the great relief of our most important trade partners to the North and the South.
In backing away from his threat to unilaterally back out of NAFTA, Mr. Obama is citing the fact that the overall value of trade between the U.S., Canada and Mexico has more than tripled to $930 billion in the years since the Treaty was put into place. Trade with NAFTA partners now accounts for more than 80% of Canadian and Mexican trade, and more than a third of U.S. trade.
More importantly, he notes that all of the evidence suggests that U.S., Mexican, and Canadian gross domestic products have grown as a result of the NAFTA Treaty. Mr. Obama points out that real hourly compensation in the U.S. business sector has risen 19.3% over the period from 1993-2007, suggesting that NAFTA may not have suppressed U.S. wages as alleged by its critics.
To further underscore his commitment to free trade and take a swipe at the special interest politics of the past, Mr. Obama has moved aggressively to remove absurdly costly protections for ethanol production and opened the door to ethanol imports from emerging markets like Brazil. And the American people, relieved to have real leadership at last, are easily convinced that removing huge subsidies to corn growers in the U.S. will help ease the distortions in the worldwide market for basic food stuffs.
Given the profound weakness in the economy, Mr. Obama has backed away from his promises to increase taxes on the returns on human capital (his redistributive tax on the top 2% of earners), and on physical capital (capital gains, dividends and corporate profits). He recognizes that what we need is more investment in all these forms of capital to stimulate the economy, and that private investment is the best way to achieve it.
Indeed, recognizing that the key to the future prosperity of the U.S. economy is--as it has always been--rising productivity driven by innovation, Mr. Obama has announced new immigration policies that will open America's doors to talented workers to meet the needs of American companies--something that Bill Gates and other great innovators have been urging for many years.
This courageous man, an attorney himself, is making a quick, direct attack on health care costs by backing tort reform that will eliminate one of the greatest inefficiencies in the economics of health care. And to address the growing gap between the most highly paid workers in our society and the rest, Mr. Obama has announced major investments in education, from early childhood to universities, to improve the quality and access for all. Education, he argues, is the best way to help those who have been displaced in the process of globalization.
This is change I can believe in!
Every four years we get to dream again. Wouldn't it be nice this time if we didn't have to wake up"
The Problem of Scarcity
Now that Obama is the new President-elect, he is going to face numerous claims, particularly from the base of the Democratic party, to the federal treasury. Tax rebates for 95% of Americans, increased government spending on healthcare and education, ballooning Medicare and Social Security expenses, etc. There is little appetite for fiscal austerity or cutting budgets. Yet, at the same time, the economy is shrinking and the targeted rich, who Obama wants to tax, is shrinking as well, and not likely to roar back if they face diminished incentives to create wealth. How will Obama react? More importantly, how will his supporters react? You should read this article by David Brooks.
A Short, Wise Quote
"The American Dream never stated that in working hard and making something of yourself, your gains should also benefit 'the man behind you.'"
Tuesday, November 4, 2008
The Rich and the Poor
We've all heard the saying "the rich get richer and the poor get poorer." Some people mistakenly take this a step further and believe that the poor get poorer because the rich get richer. Apparently, if somebody creates wealth and becomes rich, that hurts the poor, at least so goes the line of thought. Robert Samuelson, here, dissects the inequality debate, and mentions what everybody should know: wealth is something that must be created, and if you tax the creators of wealth too heavily, they will simply not create as much wealth, and then everybody is poorer.
Sunday, November 2, 2008
Tax Credits vs. Real Tax Cuts
The following Washington Post article discusses the key distinction between Obama's tax cuts, which are in reality transfer payments from people at the upper end of the income spectrum, who would see declining incentives to invest and produce, to people at the lower end of the income spectrum, and actual tax rate cuts, which effect incentives in the economy. The difference? One stimulates new economic activity and is also a good long-run boost to economic growth, and the other is not. You can guess which one.
"We've heard a lot this month about how Sen. Barack Obama's tax plans would affect Joe the Plumber -- the Ohio man who recently asked the Democratic nominee whether Obama planned to raise his taxes. Opponents of Obama seized on the incident to argue that his middle-class tax cuts are a scam. Some have even claimed that he has proposed tax increases for people with incomes as low as $32,000. Obama's supporters responded that the tax cuts are real (and noted that Joe is not a licensed plumber). The entire episode has only added to the confusion over what Obama is proposing for middle-class taxes.
How should an honest fiscal conservative see the situation? For those making less than roughly $200,000 ($250,000 for couples), Obama would not only make President Bush's tax cuts permanent but would also offer an array of new tax credits. Nobody should deny this.
To be sure, these "tax cuts" contain some sleight of hand. More than $400 billion of the money over the next 10 years would take the form of refundable tax credits paid in cash to people who already pay no federal income tax. It would be more accurate to refer to these cash outlays as cuts in payroll tax or -- even more accurately -- as transfer payments. Regardless of what the credits are called, though, they would put more money in the pockets of some American families. That sounds great in these tough economic times. Who can be against a boost to spending power and consumption?
We can. While a few of Obama's proposals may be sensible, the overall package would be bad for the economy. Unlike rate cuts for high incomes or reductions in investment taxes, most of Obama's proposed tax cuts would do little to reduce the tax penalty on work and saving. For some households, the penalty on work and saving would even increase because the new tax credits would be phased out as income rises. These proposals wouldn't deliver the economic growth that incentive-based tax cuts would.
Furthermore, there is no free lunch. Obama's middle-class tax relief would have to be paid for, either now or later. Middle-class tax cuts might make sense if they were paid for by spending cuts, but that is not Obama's plan. Like his opponent, Obama points to vague savings from reducing waste, the kind of savings that never seem to materialize. He also hopes to reap savings by accelerating our redeployment from Iraq, a project with an uncertain fiscal impact. At the same time, he proposes a wave of new spending on health-care, education, energy and infrastructure programs and declares his opposition to reforms that would reduce the growth of Social Security and other entitlement benefits.
So where would the money come from for the tax cuts and new spending? Largely from raising other taxes: the ones that have the biggest impact on economic growth. Obama would let key parts of the Bush tax cuts expire, causing the top tax rate on ordinary income to go back to 39.6 percent, up from 35 percent today. The capital gains and dividend tax rates would rise to 20 percent from today's 15 percent. Obama might also impose Social Security tax at a rate of up to 4 percent on wages and self-employment income above $250,000, starting in 2019.
These tax increases are not as bad as some Obama statements during the Democratic primaries suggested they would be, and they fall well short of what some of his conservative critics claim. For example, Obama does not propose to tax dividends at 40 percent or to impose the full 12.4 percent Social Security tax on high earners.
His real proposals, however, would still be plenty damaging. If rewards for America's entrepreneurs and firms are reduced through higher marginal tax rates, their incentives to earn, invest and create jobs will be diminished. Americans will have less incentive to save, and firms will have less incentive to pay dividends. Tax avoidance will become more profitable. A smaller capital stock will mean a less productive economy and lower wages for middle-class and other workers. These disincentive effects also mean that the revenue gain is likely to be smaller than Obama envisions.
In sum, Obama may very well give Joe the Plumber a tax break, but only if Joe does not become too successful. Obama is offering real tax favors for the middle class, but not real benefits for the economy."
"We've heard a lot this month about how Sen. Barack Obama's tax plans would affect Joe the Plumber -- the Ohio man who recently asked the Democratic nominee whether Obama planned to raise his taxes. Opponents of Obama seized on the incident to argue that his middle-class tax cuts are a scam. Some have even claimed that he has proposed tax increases for people with incomes as low as $32,000. Obama's supporters responded that the tax cuts are real (and noted that Joe is not a licensed plumber). The entire episode has only added to the confusion over what Obama is proposing for middle-class taxes.
How should an honest fiscal conservative see the situation? For those making less than roughly $200,000 ($250,000 for couples), Obama would not only make President Bush's tax cuts permanent but would also offer an array of new tax credits. Nobody should deny this.
To be sure, these "tax cuts" contain some sleight of hand. More than $400 billion of the money over the next 10 years would take the form of refundable tax credits paid in cash to people who already pay no federal income tax. It would be more accurate to refer to these cash outlays as cuts in payroll tax or -- even more accurately -- as transfer payments. Regardless of what the credits are called, though, they would put more money in the pockets of some American families. That sounds great in these tough economic times. Who can be against a boost to spending power and consumption?
We can. While a few of Obama's proposals may be sensible, the overall package would be bad for the economy. Unlike rate cuts for high incomes or reductions in investment taxes, most of Obama's proposed tax cuts would do little to reduce the tax penalty on work and saving. For some households, the penalty on work and saving would even increase because the new tax credits would be phased out as income rises. These proposals wouldn't deliver the economic growth that incentive-based tax cuts would.
Furthermore, there is no free lunch. Obama's middle-class tax relief would have to be paid for, either now or later. Middle-class tax cuts might make sense if they were paid for by spending cuts, but that is not Obama's plan. Like his opponent, Obama points to vague savings from reducing waste, the kind of savings that never seem to materialize. He also hopes to reap savings by accelerating our redeployment from Iraq, a project with an uncertain fiscal impact. At the same time, he proposes a wave of new spending on health-care, education, energy and infrastructure programs and declares his opposition to reforms that would reduce the growth of Social Security and other entitlement benefits.
So where would the money come from for the tax cuts and new spending? Largely from raising other taxes: the ones that have the biggest impact on economic growth. Obama would let key parts of the Bush tax cuts expire, causing the top tax rate on ordinary income to go back to 39.6 percent, up from 35 percent today. The capital gains and dividend tax rates would rise to 20 percent from today's 15 percent. Obama might also impose Social Security tax at a rate of up to 4 percent on wages and self-employment income above $250,000, starting in 2019.
These tax increases are not as bad as some Obama statements during the Democratic primaries suggested they would be, and they fall well short of what some of his conservative critics claim. For example, Obama does not propose to tax dividends at 40 percent or to impose the full 12.4 percent Social Security tax on high earners.
His real proposals, however, would still be plenty damaging. If rewards for America's entrepreneurs and firms are reduced through higher marginal tax rates, their incentives to earn, invest and create jobs will be diminished. Americans will have less incentive to save, and firms will have less incentive to pay dividends. Tax avoidance will become more profitable. A smaller capital stock will mean a less productive economy and lower wages for middle-class and other workers. These disincentive effects also mean that the revenue gain is likely to be smaller than Obama envisions.
In sum, Obama may very well give Joe the Plumber a tax break, but only if Joe does not become too successful. Obama is offering real tax favors for the middle class, but not real benefits for the economy."
Drug Companies and Innovation
In this Forbes article, Charles Hooper discusses the process that drug companies go through in researching, developing, and producing new drugs, and how this process is affected by government policy of both the US government and other governments around the world. In particular, he disputes the notion that drugs are "too expensive," and addresses what he think a President Obama might mean for the pharmaceutical industry.
Saturday, November 1, 2008
Vernon Smith on Obama
Thanks to Greg Mankiw for this:
A letter in the Wall Street Journal from Nobel Prize winning economist Vernon Smith:
I think the answer to Alan Reynolds's excellent question and article ("How's Obama Going to Raise $4.3 Trillion?," op-ed, Oct. 24) is that Barack Obama is not going to raise $4.3 trillion, and he is not going to perform on his rhetoric. He excels as a rhetorician -- common to both the great and the least of past presidents -- but performance cannot run on that fuel. Inevitably, I think his luster will fade even with his most ardent supporters as that reality sets in. We also have seen luster fade time after time with Republican presidents. The rhetoric of a smaller and less invasive government always leads to king-size performance disappointments. This weakness is as central to the reality of our political economy as are its strengths. With all its foibles, its strengths become transparent when you compare it, not with our various idealizations, but with the litter of human experiments in political economy that have delivered far more suffering and murder than human betterment to the citizens of those economies.
Of course it is entirely likely that Mr. Obama will succeed in going for higher business, capital gains and income taxes, but it is an economic illusion to think for a minute that this will benefit the poor. All our wars on poverty have been lost by failing to help the poor help themselves. Higher business taxes, which ultimately can only be paid by individuals anyway, will simply export more economic activity to the world economy. Higher capital gains and income taxes will primarily reduce savings and investment at the expense of greater future productivity, which is at the heart of cross-generational reductions in poverty. A dozen countries, including the third largest economy, already have zero taxes on capital gains, and eight of them score high on the Economic Freedom Index and high in gross domestic product per capita.
I favor making all individual savings and direct investments deductible from income for tax purposes. In that world there would be no need to make any distinction between ordinary income and capital gains. By adding a negative feature to such a net consumption tax, the poor would not only receive redistribution benefit, but have an incentive to save and accumulate capital. Some poor will see this as an opportunity to help themselves.
Vernon L. Smith
A letter in the Wall Street Journal from Nobel Prize winning economist Vernon Smith:
I think the answer to Alan Reynolds's excellent question and article ("How's Obama Going to Raise $4.3 Trillion?," op-ed, Oct. 24) is that Barack Obama is not going to raise $4.3 trillion, and he is not going to perform on his rhetoric. He excels as a rhetorician -- common to both the great and the least of past presidents -- but performance cannot run on that fuel. Inevitably, I think his luster will fade even with his most ardent supporters as that reality sets in. We also have seen luster fade time after time with Republican presidents. The rhetoric of a smaller and less invasive government always leads to king-size performance disappointments. This weakness is as central to the reality of our political economy as are its strengths. With all its foibles, its strengths become transparent when you compare it, not with our various idealizations, but with the litter of human experiments in political economy that have delivered far more suffering and murder than human betterment to the citizens of those economies.
Of course it is entirely likely that Mr. Obama will succeed in going for higher business, capital gains and income taxes, but it is an economic illusion to think for a minute that this will benefit the poor. All our wars on poverty have been lost by failing to help the poor help themselves. Higher business taxes, which ultimately can only be paid by individuals anyway, will simply export more economic activity to the world economy. Higher capital gains and income taxes will primarily reduce savings and investment at the expense of greater future productivity, which is at the heart of cross-generational reductions in poverty. A dozen countries, including the third largest economy, already have zero taxes on capital gains, and eight of them score high on the Economic Freedom Index and high in gross domestic product per capita.
I favor making all individual savings and direct investments deductible from income for tax purposes. In that world there would be no need to make any distinction between ordinary income and capital gains. By adding a negative feature to such a net consumption tax, the poor would not only receive redistribution benefit, but have an incentive to save and accumulate capital. Some poor will see this as an opportunity to help themselves.
Vernon L. Smith
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