Reason for a New Age

Posts Tagged ‘debt’

Romney 5-59

Posted by publius2point0 on 2012/10/14


Mitt Romney, candidate for President of the US, has been reluctant to discuss policy in public beyond high level soundbites like, “I will reduce the deficit.” To many, this has seemed a dishonest method to go about running your campaign, but as he has pointed out, anyone who so cares to do so can look up his 59-point plan for turning around the economy – the economic situation of the nation being his principal running issue for the election.

Now, I have realized by going back over some of my old posts that I have never been great at bringing quotes from materials into the body of my text. This may be unfortunate, but I’ll just note that I am going to maintain this standard for at least this one article, given that the full document is some 153 pages and I don’t have an interest in writing something of equal length, nor of breaking the document into sections to be discussed over many weeks. I would recommend to read the plan alongside my text.

Here is the full document.

One general commentary that I will make is that I am quite pleased with the honesty of the document. The numbers it cites come from the OECD, the Office of Management and Budget, the Bureau of Labor Statistics, etc. Up to page 63 (the Heritage Foundation), there isn’t a number in the document that anyone could decry as patently deceitful (which people are liable to do, when discussing a partisan think-tank). Most significantly, the Office of Management and Budget is a cabinet office, and hence no number from this source can Obama decry.

Starting off, it mentions the larger 5-point plan:

End Obamacare

After this bold proclamation of a title the explanation then waffles about any specifics. In plain speech, it effectively says, “We’re going to direct all the agencies who were tasked with choosing how to implement Obamacare to cut out anything that they believe is wasteful.” I am not impressed, and otherwise he doesn’t seem to actually comment on Obamacare anywhere in the document except as the occasional pejorative. Turning instead to places where he has actually been questioned on his stance on health care, the result seems to be that he supports a personal mandate to purchase health care, with the government stepping in to pay it for those who can’t. He pushes towards making the only insurance providers private, not public, which I also encourage, but that is not significantly different from ObamaCare in any short nor long-term way. What he does say, that is different, is that private insurers should be no different from insurance gained via an employer. That is the one step that the nation needs to make, and a good one. Saying that he wants to end ObamaCare is a meaningless soundbite, which I’m sure he’s aware of. The real plan here seems solid.

Cut Red Tape

Again, “I will tell everyone to stop doing all those bad, costly things they shouldn’t be doing.” We will have to see what the document says further along as this is meaningless as stated.

Boost Domestic Energy Production

“I will direct the government to rubber stamp any applications to drill, where the application is a clone of one which has been submitted before.” I.e., if Charlie has used a Turboencabulator x5000 to make widgets before and everything went well, with no complaints, and now Charlie wants to use the exact same Turboencabulator x5000 to do the same thing in basically the same conditions, there’s no purpose in re-doing all the red-tape and paperwork that was involved the first time. Romney wants to streamline this process.

I suppose that this seems reasonable. But I would really need to question just how frequent an occurrence this is? Given advances in technology and the difference in geological makeup from one location to the next, I’m not sure that I would trust that there’s ever really two setups that are so similar as to merit a pass. And of course, this would mean that companies need to file paperwork to get checked for whether they should go on the fast-track or the old, slow path. For those who are rejected, they now have even more red tape to get through than before.

More importantly, I would rather see something more dynamic as regards our energy future – nuclear, natural gas, smart grids, etc. Overall, I’m reading this as a fluff piece to keep the average Republican who wants to thumb their nose at the Democrats happy, when in reality, Romney has basically committed to nothing.

Call out China as a Liar

To actually quote the body of the text, “Directs the Department of the Treasury to list China as a currency manipulator in its biannual report and directs the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency.”

I think the main thing to say about this is that it’s never going to happen. The grand majority of American debt is held by China. For us to start down a warpath of trying to ruin their credit rating around the world is just going to be met by them coming to call for us to repay what we owe them.

While I think we would be the ones with the more morally righteous foundation to stand on in that particular game of chicken, the end result will be that we’ll be the ones to swerve. China doesn’t feel bad about behaving badly, they’re never going to admit that they’re lying about their financial situation. The US will continue to honestly admit that we owe them quite a bit of money and quickly come to realize that we just look like buttheads to go after our creditor, however bad they are.

Overall, Romney would be a fool to do this, and certainly Congress and the Senate will do their best to shut it down.

Remove any Pro-Union Laws Initiated by Obama

Unfortunately, I don’t know much about this. My belief had been that Obama was relatively tepid about unions. For years, GM was making awful, archaic vehicles. Starting a couple of years ago, they began to see their reappearance in the limelight with car shows featuring their vehicles and positive reviews coming out about them. This had lead me to believe that GM (by order of Obama) had gone union busting in an attempt to curb the thinking processes that spoiled innovation, as well as shutting down the unfeasible pension plans the unions had bargained themselves into that were ultimately killing the company. Apparently, this was not the case. The unions are now part owners of GM and outside of some contract workers, Obama only seems to have been working to preserve the full payment of those pensions. Given that, I suppose that my only fallback explanation for how GM started to make a few decent cars is in the same manner that the Russians got into space: Technological theft and pointed political pressure to create one or two reasonable items, at the expense of everything else. It may be that GM bankruptcy #2 is just around the bend.

Anyways, we shall have to see what Romney says further on in the document, if anything. Not enough is said here for me to evaluate his approach.

 

Going on to the rest of the document, the first section is his Tax Plan, starting on page 40.

Tax Plan

I will skip over a few of the lesser items that are mentioned, but the general gist is the lowering of taxes. The big items follow.

Simplify the Tax Code

Romney desires to restructure the tax code and make it simpler and more rigorous. This appears to be less out of a desire to raise or lower the tax rate so much as due to the realization that an additional 36.4% beyond what is paid in taxes is spent on avoiding taxes. While it may be true that people can reduce their tax burden to 0% if they get sufficiently creative, it’s still likely that most people pay more to avoid a percentage of their taxes than they would pay just by paying their taxes. Making that the case saves the people money and allows the government to lower tax rates without lowering receipts.

While I question the accuracy of these numbers – it doesn’t seem like something one can accurately quantify without a lot of assumptions – overall this seems like a reasonable goal on the face of it.

The problem with this proposal is two-fold. Firstly, reducing spending is always equivalent to laying someone off. Specifically, if this measure reduces the spending on tax lawyers and tax advisers across the nation by 50%, then that is equivalent to laying off 50% of all tax lawyers and tax advisers across the nation.

Secondly, the reason for the bizarre tax code is because the principal method by which politicians hog trade or otherwise seek to achieve political ends is by affecting the tax code. In example, if you are the governor of a state which relied on corn sales to support the populace, getting tax breaks for the local corn businesses from the federal government is a big win. If you’re a president who is pro-union, removing the tax burden on union-guaranteed pension plans is a method of accomplishing your aims.

At the end of the day, all tax loopholes or disincentives that have been imposed are due to the political might of some corporation, party, coalition, or other entity. While it may be the case that to the majority of those who are taxed, these tax oddities are annoyances, and if we all voted on it we would vote to simplify and standardize tax code, the reality is that we don’t live in a democracy. Those who are willing to make their way to Washington DC and play hardball are the ones who get the grease, and the rest of us do not.

Fundamentally, I don’t think that Romney could hope to have much if any traction on this issue short of removing the lobbying system. But minus an alternative method for protecting against the tyranny of the majority (i.e. the lobbying system), I don’t know that I could really advocate this. I’m more concerned with the rights of advocacy groups like the NRA, the ACLU, or the Financial Industry. Minus pushback from the Financial Industry after Obama was elected, for example, I’m sure that ObamaCare would have done more than simply establish a new government health care agency. Private health care may well have gone away entirely.

Transition to a Territorial Tax System

Apparently, at the moment, the US taxes money which was earned abroad by a corporation as soon as the money hits American shores (though only if the US tax rate on that money is higher than the foreign tax rate, and only for the difference of the two). The theory that Romney offers is that this reduces the desire for American companies to bring the money home and invest in American growth.

According to Warren Buffet, “I have worked with investors for 60 years and I have yet to see anyone—not even when capital gains rates were 39.9 percent in 1976-77—shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.” I’ve seen people take this to mean that taxes don’t factor into business decisions in the real world – it’s all just a myth. It’s possible that Buffet meant it that way – though it’s also possible that he was being political and adjusted his phrasing of the truth towards that sort of interpretation. It’s probably true that people don’t invest in places with low tax rates and shy away from places with high tax rates. Rather they invest based on the sum total of all numbers – which includes tax rates, but also includes expected profit margins, growth rates, etc. – which overall form a “sensible” or “nonsensical” investment. The fact of the matter is that all the big box stores in the Seattle area are in the city of SeaTac because it offered them a tax incentive to settle there.

Delaware has a large number of the incorporated business of the US as “legal denizens” even though the headquarters are in other states, because Delaware has a long history of dealing with business law and its easier for businesses to work together if they’re all under the same legal system. So certainly taxes aren’t the only factor that a business or an investor takes into account, but that doesn’t mean that there aren’t times when the number that makes everything come together be the tax rate at location X. Ultimately, every point you have in your favor as someone making a bid for new business is one more point in your favor.

So while I believe that Romney is correct in his assessment here, this still comes down to Keanesian math. He’s proposing to raise the deficit by cutting taxes for the sake of stimulating the economy. While the specific methodology is different, the big picture isn’t much different from Obama.

Regulatory Policy

The majority of this section of the document talks about the amount of money spent by businesses in dealing with Federal Regulation (specifically, $1.75 trillion), in a generally negative tone. Of course, this disregards the fact that regulations are (at least in theory) intended to provide benefits. For example, say that my preferred method of doing business is to literally work my employees to death and then replace them with fresh new employees. The government does some math and determines that giving trained workers 20% more personal time so that they do not die on the job ends up sparing the economy the losses incurred by training row after row of unskilled labor, while freeing those bodies for other, new industries. Overall, this regulation on my business, while costing me money in the sense that I must now close down the factory for a few hours each day, it will end up benefiting me by an even greater amount, such that I actually end up profiting.

The question isn’t how much regulation is costing us, it’s what is the cost-benefit tradeoff on average? Since 1997, the Office of Management and Budget has been required to analyse and report these values to the best of their extent. For example, here is the 2011 report. If you look over their numbers, you will note that the average ratio is positive. Of course this makes sense. If anyone was reporting a detrimental regulation, financially, you would expect it to be cut. Of course, if your livelihood thus depended on the financial cost/benefit ratio of a particular regulation, you might be inclined to provide favorable estimates. Still, one can pontificate on the true reliability of this report till his head starts to float off blissfully into the clouds, the fact would remain that you’re limited to what data there is in existence, and this is it.

But so what, precisely, does Romney intend to do about any of this? This seems to come down to the REINS Act.

I think we will need to take a step back to understand this.

Most government regulatory agencies, like the EPA, are part of the Executive Branch of the government. At some point in the past, Congress and the Senate were convinced to cede the day-to-day nitty-gritty of managing the welfare of the environment to a group with greater technical knowledge of the impact of particular technologies and wastes. Now that they have ceded this power, their ability to control the regulations created by these groups is limited to that they have over any Executive power – not much.

Technically, they can veto anything which the President or other body of the Executive Branch has passed, but this takes some effort. The Congressional Review Act de-ceded some of this power, stating that new regulations have to be passed by Congress – though if Congress doesn’t care to bother reading through or voting on the regulation within X amount of time from submission, then it will become law on its own. This spares them having to vote on every single thing the regulatory agencies are doing, while giving them the theoretic ability to block anything whatsoever that they do not want.

The REINS Act strengthens this by further stating that if the cost analysis of a new regulation exceeds $100 million (presumably, in today’s dollars), then it does not get the automatic pass. It must be passed by the Legislative branch officially.

Now that we understand the act…so what? To date, the Legislative branch has largely ignored their power to review legislation. Unless something makes headlines, they really don’t care and very few people are so bored as to sift through Federal regulations, hoping that a body which is specifically designed and crewed to review and monitor one particular bailiwick of the world will flub up in some glorious fashion.

If I work in a research group in the Department of Agriculture and want to propose something to my superiors that will have a noteworthy impact on the economy of the nation, I’m doubtful that I’ll do so flippantly. Is the bar for me to prove my work to my bosses in the DoA lower than it is for them to sell my work to the Legislature? Given that they have the technical background to analyze my work, probably not.

Overall, I don’t see a large demerit to the passage of this law, but nor do I see a great bonus. Romney has failed to make any strong case for using 1/7th of his plan target Federal Regulations. The most favorable thing I can say is that perhaps the number of specifics was too large for him to present in a document like this. The document doesn’t make any indication to this effect, though.

 

To be continued in a part 2.

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Market Bubbles

Posted by publius2point0 on 2010/06/05


For the purpose of explaining a market bubble, I’m going to use the example of comic books. I do this because bubbles can form around any economic activity. It’s not just the stock market which can form a bubble — as the housing crisis demonstrated.

Let’s say that we have a world with 10,000 people in it. 1,000 of those people like to read comics and each would like to collect the complete set of each of their favorite comics. Unfortunately, early issues of comics are scarce because they were unknown titles with no audience following. Printing off a lot of them, at the time, would have been silly. But with a growing audience and ever growing number of issues being published, the total number of people who want the full series from the start is more than is physically possible (assuming that new copies of old issues can’t or won’t be made, which we will assume).

Within our smaller market of 1,000 people, it will be fairly well understood that if you want the first issue of Superman you’ll probably not be able to get it unless you’re quite wealthy. If you happen to be someone fairly poor who collected Superman when you were young and still have it today, it’s very likely that one of the wealthy comic collectors will offer you a value that you simply can’t refuse, and subsequently he most likely won’t let it go for any price. But, as soon as our poor comic fan gets this money, he will almost certainly instantly turn around and buy old issues of some of his personal favorite series that aren’t so popular as Superman. In end result, the market for comic books isn’t profitable for anyone. The use of money allows the series to be distributed around according to wealth and fandom. All money gained is immediately spent. The amount of money that is in the comic market is limited to how much the actual fans of the comics have and are willing to spend on their hobby.

Now, let’s say that a non-comic book fan inherits his fathers old comic books. He discovers that there’s a market for these books, so he goes and sells them. While doing so, he discovers that some of them are worth fairly significant amounts of money and that due to the growth of audiences, one can buy comics, sit on them for 10-30 years, and sell them for up to thousands of times the cover price. If he was to embark on this bit of financial speculation, he wouldn’t be doing so to get his favorite comics, but rather for the purpose of making money based on his observation of how the market works.

A person can, essentially, make money like this. He’ll profit off of the comic book fans, leaching money from their contained economy, which money he’ll spend in the general market, and which eventually makes it back to the comic book fans so that things are more or less even.

The problem comes when a significant number of people come in to try and profit from the comic book market. Instead of buying and selling from fans, they’re liable to purchase from each other and that is a problem.

Let’s say that 80% of our comic book fans have $1 per day that they are willing to spend on their hobby. A further 20% have $10 per day that they are willing to spend. The total market is $2800 per day and that doesn’t change with time. Now a speculator comes in and buys up a significant number of comics that he thinks will be big sellers. He is willing to pay however much he thinks he can pay and still make a profit, not based on his personal budget compared to his level of fan-love for those titles. Now he waits 10 years and goes to sell them. If there he finds someone else who thinks he can make a profit if he takes those and waits another 10 years, he might sell to that person. Ultimately, the total amount of money in the comic book market might be double or triple the natural value of $2800 per day. Eventually, the prices become so high that the fans can’t afford to buy the comics anymore and all of the market action is between people who have no interest in the product. And at that point, it becomes only a matter of time before everyone realizes that there isn’t a guaranteed end-purchaser. Their only hope for selling the comic books that they have stored up is by finding someone else who isn’t aware that there’s no guaranteed market for the item and selling it to him, and of course as the panic hits and news spreads, that becomes impossible.

In the end, there was only $2800 per day to be made and the only way to guarantee that there would be someone who would want to buy the comic books you had was by maintaining the market at something near its natural equilibrium.

Overall, this seems to imply that speculation is inherently a broken process. Many markets can be grown by speculation as pointed out in several blogs (1, 2, and 3). But even in such a market, there is a true level of more-or-less guaranteed returns above which you’re just playing find-the-greater-sucker so far as fiscal realities go.

The people within the comic book market may have acted like the speculators all along, but their gambles were based upon an inherent knowledge of realistic returns gained by being part of the actual market and seeing how it moved from day-to-day. They don’t bank on being able to make more than is realistic because they actually know what is and isn’t realistic. The problem with the outsiders isn’t so much that they entered the market, but that their valuation of the products wasn’t based on much knowledge of the fundamentals of the size of the market or its capability for growth. They just knew that other people were speculating, and this they should buy in too. They didn’t know how much was reasonable to put in to the market, they just threw in however much they had lying about that they felt alright to gamble with — which is an essentially arbitrary value. If the total quantity of money invested is significantly larger than the market is worth, then everything comes crumbling down.

But then the question becomes, where did all the money go?

The only way for money to “disappear” is for it to be paid back against debt. When you over-speculate in a market, for instance by buying up comic books, that money is going to other people who (mostly) spend it on perfectly rational endeavors. Essentially, everyone who was wiser is richer for it.

The problem is that money is only spent with the expectation of more money coming back in at a later time. There is the expectation of future growth.

Say that a small money lender, Jeff, loans Tanya $50 to buy comic books. Another man, Berkley, comes to Jeff and asks for a loan to buy a bicycle so that he can travel all the way to a better job making more money. Jeff is expecting to be able to make something like $70 from Tanya. Berkley came in at this point to buy the bicycle because he’d already made $50 selling a few comics at insane prices to some crazy lady and with that $50 and a loan of $70, he’ll be able to buy the bicycle and get the job making enough money to pay off his bicycle.

Jeff checks with Tanya and finds out that she can’t find a buyer and she has to default on the loan, and subsequently he declines to give Berkley the loan for the bicycle. Jeff takes all of the comic books away from Tanya and sells them to Berkley for $10 (their true value), but Berkley still holds most of the money that Jeff needs to get out of debt — currently at a total of -$40. Berkley could still afford to pay Jeff something like $85 in exchange for a loan of $70, which would get Jeff up to only -$25 of debt, but he’s worried about worsening his debt when he doesn’t have any money sources at the moment and is already in debt himself. Berkley has enough extra money — $40 with no useful purpose since he can’t afford the bike — that he could lend or even give to Jeff to get him out of the hole, but he’s not a money lender. He doesn’t feel safe in knowing where to speculate with his money that he could likely recuperate it, nor is he set up to do so.

Now, theoretically, the government can step in and either loan Jeff money or simply clear his debt. If they loan him money, over a long enough time period, eventually Berkley’s excess $40 will trickle its way back to Jeff so that he can catch up. If they clear his debt, they are effectively printing money and devaluing the money base — which might be looked down upon by other people as if Jeff lent money to bad investments once before, he might do so again and continuing to devalue the money base leads to a loss in market confidence as well. Though as this is expanding the fundamental money supply (as I termed it), no actual debt is taken on by the government in doing this.

Essentially, the more popularly accepted answer among economists has been for the government to loan the money as this solution makes everything balance out alright in the end. Of course, it ignores the fact that you’re loaning money to someone who has lent money to bad investments once before. It’s not terribly clear why humanity seems to think that this somehow makes it better, but so it seems to do.

In truth, neither solution is particularly better or worse than the other so far as the economics go. The only question is whether Jeff istruly  safe to prop up, and whether either solution will get Berkley to get back into the game instead of holding on to his excess $40, waiting for things to clear.

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