Ramblings of a Megalomaniac

I’m not surprised when reporters say incorrect things about an economy.  They’re reporters, they’re just repeating what someone else said, and often someone’s using hyperbole to recruit people to their side.  

Consequently, when everyday citizens incorrectly describe an economic policy or condition, I think it’s just the reflection of poor reporting on the subject coupled with the rhetoric of people looking for some political gain.  Most people don’t understand economics, and don’t really want to get into enough details to start “getting it.”  It can appear to be a daunting subject.

But when economists incorrectly describe a situation, it’s really frustrating.  This is common when talking about monetary policy.  It’s described as “tight” or “loose,” or money is described as “easy” or “tight.”  The problem is that people get this backwards.

When the Fed lowers interest rates, it’s doing so to increase the money supply to help stimulate economic growth.  When it raises interest rates, it’s trying to shrink the money supply to curb inflation.  Consequently, when interest rates are low, people say that’s “easy money.”  On the surface, that might sound correct.  The Fed is increasing the money supply, so there’s more money available, and lending should increase.  The problem is that it’s wrong.  

The fed will lower rates to try to make money easier, but that doesn’t mean money is easy.  They’re making money easier because it’s been too tight.  The Fed is trying to combat tight money, by making money easier, but that doesn’t mean money is easy.  When the Fed cuts interest rates, it means money is too tight, and they’re trying to counteract that problem.  Conversely, when the Fed raises interest rates, people refer to that as tight money.  But what it really means is that money is currently too easy, and they’re trying to reign that in to counteract current inflationary trends.  Higher than targeted inflation means money is easy.  Lower than targeted means money is too tight.  

Which brings us to our current situation in the US.  Almost everyone describes the situation as “easy” or “loose” since the Federal Funds Rate is near 0%.  That’s actually incorrect.  The rate is set that low because money is too tight.  Economic growth isn’t as fast as we’d like, and inflation is *under* the target of 2%.  That second point is a big deal because since the Fed started putting more emphasis on inflation, we’ve rarely deviated from our targets by more than 0.1% in a given period, and will immediately adjust.  Except since the 2008 financial crisis.  Inflation has been consistently too low.  Lower than targeted inflation means money is too tight.  We’ve been too tight for the past several years.  And since we can’t make interest rates negative, the Fed has been doing what it calls Quantitative Easing as another method to try to increase the money supply.

The fact that money has been too tight, not too loose, during our economic downturn and subsequent recovery effort doesn’t sound right to most people.  This is further muddled by political efforts to stimulate the economy with lots of stimulus spending.  It feels like the government is throwing money around all over the place.  But that’s not monetary policy, it’s fiscal policy.  What the Fed does is monetary policy.  They’ve had money too loose.  Bernanke knows it, and that’s why he’s on his third round of QE, which is set to be continuous until the recovery is underway.  Most of what he says hints that he knows that we need looser money, but monetary policy must be agreed upon by a committee.  Convincing inflation hawks to through hundreds of billions of dollars into the money supply is a tough sell. 

Political disclosure: This author does not support either major political party.  Current views are similar to this:  ”At the moment, the GOP seems evil, the Dems seem like complete morons, and the public seems screwed.”  Adjust your mental filter as needed before reading.

In US economic-related politics, the GOP says that taxing businesses slows economic growth.  The Dems are worried about income inequality.  Both don’t like the high unemployment and slow recovery, but differ as to how to fix it.  This posts addresses these points.

The first thing we need to realize is that government taxes generally serve two purposes:

1. Raise revenues for the government
2. Discourage (usually) undesirable behavior

That’s it.  They usually come with a ton of secondary effects that politicians either underestimated or (way more often) didn’t predict.   Let’s ignore the raising revenues component for now as we can change the tax code to do just that after we’ve really identified what we want to encourage/discourage.  

We always want a strong economy, and currently we want lower unemployment.  That’s actually relatively simple to fix.  Abolish corporate income taxes and the payroll tax.  Completely.  0%.  I know I just made a bunch enemies with that statement, but hear me out.  First, the payroll tax.  We want more hiring, not less.  But taxes discourage the behavior that’s taxed.  The payroll tax makes it more expensive to hire any and all workers.  THAT’S DISCOURAGING THE BEHAVIOR THAT EVERYBODY WANTS (hiring more workers).  Why are we continuing this practice?!  And abolishing it for only a year or two doesn’t do much.  Companies know that they’ll be paying the taxes for those additional workers in short order, so it’s either hire the new workers and go through the costs of training them, then probably firing them (and any potential legal costs with that) 12 months later, or just go about business as if the cut didn’t happen.  How many jobs is this tax costing?  Here’s my back-of-the-napkin quick math (I’m sure it’s not this simple)

Currently, I believe the payroll tax is something like 4.2%.  Unemployment is 8.2%, or put another way, employment is at 91.8%.  Top economists from all sides say that we want it somewhere around 95%.  If the entire savings of the payroll tax went into more employees (which should drive up productivity and increase profits), that comes out to this:

91.8 (current employment) * 1.042 (increased by 4.2%) = 95.66% (4.34% unemployment)

That scenario solves the unemployment issue.  My cynical mind thinks that it’s more likely for only 1/2 of the money to be spent on more employment and the other 1/2 pocketed, but that would still bring us to 93.72% (6.27% unemployment).  Still a far sight better than the 8.2% we currently have.  

Now to my much more controversial suggestion: eliminate all corporate income taxes.  Follow me on this one.  Many gigantic corporations aren’t paying much in taxes anyway. They hire top-notch accountants and tax attorneys to come up with legal (or uncatchable) ways of lowering their tax burden.  Really, they’re just creating a bunch of work (and costs) to the IRS (and thus tax payers).  But of the ones that do pay their “fair share,” it’s hurting their business.  If 28% of their income goes straight to the government, that’s 28% that doesn’t go to R&D, more employees, better benefits, or to the business owners (shareholders).  I’m sure many don’t care if the shareholders don’t get a dime, but I do.  If they don’t, people stop investing in US companies.  Or US companies move more and more operations out of the US.  We want these companies spending more money on employees, R&D, and whatever else.  And we want more money coming into the US for investment.  AND we want more companies setting up their headquarters in the US.  Let them set up shop here.  That’s a bunch of new, white-collar jobs for Americans each time a company moves here (or starts here).  Let the US be the tax haven for the world, not the Caymans nor the Seychelles nor Nevis nor anyone else.  If we need to, we only give tax breaks to foreign companies with X% of their global jobs here, or a set nominal number of jobs.    

Bring your jobs and investment to America, and we’ll reward you with no corporate income tax!

Now, this doesn’t address the Dems concern about income inequality.  To that, I say, if we’re concerned about inequality of individual income, then tax that, not the corporations.  Here’s the pitch to the rich: We’re raising your income taxes, but now we’re only taxing it once.  As it is right now, income is taxed at the corporate level, then again at the individual level before business owners (shareholders included) actually get their money.  The nominal values might be 28% and 35%, but taxed at both of those rates twice means an effective tax rate of 53.2%.  Save them money by capping the the top income tax at 50%, and still increase the amount of revenue due to many more jobs.  

Personally, I don’t think soaking the rich is the right way to go about things, but if that’s what we want to do, then let’s actually do *that* instead of hindering economic growth by taxing corporations so highly.

In early January of 2009, I went on a first date with a girl.  Things were going well, until she decided to bring up different economics topics.  Being a rather avid student of economics for several years, I knew this would prove to be a bad idea.  

We’re all armchair economists to varying degrees, and I never fault anyone for being less knowledgable in a field than myself.  I do, however, fault people who are substantially less knowledgable, ignore empirical evidence, cannot actually understand the true effects of supply and demand, use *incredibly* poor qualitative reasoning to determine the proper policy, and strongly believe they’re more knowledgable than anyone without even the slightest hint at humility or the fact that they could be (and most likely are) incredibly wrong.  Back to the date.

It started with differing opinions of what policies are best for economic growth, the middle class, etc.  But then she dropped this bombshell on me:

The US should switch to the Euro.

Not “Maybe…” or “I’d like to see a study on if…” or even just “I think…”  Nope.  Said with authority.  When I probed why, I got the following response. 

The Euro has been going up while the dollar has been going down.

Ugh.  I masochistically asked for more explanation.  I tried to explain that it’s important for a modern economy to control its own currency, but even that if we didn’t want to control it, we shouldn’t relinquish the power of it to competing nations who will use our currency to benefit their nations, not ours.  I explained if she wanted a stronger dollar, there are ways to do that, but like all interventionist policies, they come with a price and that the costs nearly always outweigh the benefits.  I explained that even if we wanted to join the Euro, we likely wouldn’t be allowed in.  All my words fell on deaf ears.  

Long story short, as soon as she uttered that we should switch to the Euro, I knew I didn’t want a second date.  It was more the way that it was presented as an irrefutable fact, rather than postulating a hypothesis.  Here we are, just over 3 years later, and the Euro zone has been having major issues for over two of them.  Our economic situation would likely be far worse if we couldn’t control our own currency and our recovery was weighed down with the problems Ireland, Italy, Portugal, Spain, and, of course, Greece have shown over that time frame.  

I think the time since she stated her “facts” has shown that she wasn’t right.  Sometimes we need a good “I told you so.”

PE Gobry recently wrote an article proposing that the way to “fix” the lobbying problems the US has with government was to give our Congressmen(women) a much bigger budget.  For those interested, the link is here.  

I think he’s wrong, but not on the wrong track.  Mr. Gobry posits that the reason politicians listen to lobbyists is that the politician doesn’t have the resources to properly research the real effects of a given proposal, and thus need to go with the data and suggestions lobbyists give them (accompanied by money, of course).  He calls this the “legislative subsidy,” that is lobbyists are doing and paying for a lot of the work that the politician’s offices should be doing.  His suggestion is to provide each politician with a yearly staffing & research budget, example given was $20 million, provide oversight to prevent abuse, and we’ve fixed the lobbying problem!

I actually have no problem with giving politicians a $20 million/yr staffing and research budget.  It’s probably higher than it needs to be, but a drop in the bucket of the enormous federal budget, and if it causes politicians to make the correct decision one more time than they otherwise would, it probably just paid for itself.  I just don’t think that fixes the problem.

My main contention with Mr. Gobry’s position is that he believes the reason politicians go to lobbyists is for the “legislative subsidy,” and that if the politician can fund his own research, they won’t go to lobbyists.  That’s just wrong.  Politician’s will still go to lobbyists.  Running a campaign is *really* expensive, and there is a continuous drain on the politician’s funds throughout their tenure.  They need a lot of money to keep their jobs.  Adding a bunch of money for staffing and research would help, in that it shifts a politician’s funds away from staffing and toward other expenses.  But it doesn’t solve the problem that politicians need *A LOT* of money.  

No solution offered from me, yet.  Just a friendly critique of the Atlantic’s article.

***Edited to the proper gender for Mr. Gobry.  My apologies to you.  It was a mistake, and not meant as any swipe or disrespect.***

ORIGINALLY POSTED ON AN OLD BLOG OF MINE….

I figured I’d introduce this blog to the world with something better than the hi-my-name-is-john-and-i-like-this-and-i’m-real-excited-about-blogging-and-i-speak-my-mind-and-i-really-think-you’ll-like-my-blog post. Instead, the world gets this. I warn you, this is a longer post. Hopefully, most won’t be this long.

I live in the U.S., and thus I’m allegedly given a voice via the democratic republic structure that is the American government. I inherently distrust politicians as the ones who are truly forward-looking and not spinning rhetoric are ousted while the career politicians are in bed with whomever they need to be and slinging whatever dirt must be slung to win re-election. With senators receiving 6-year terms, they can afford to be a bit more forward looking than the representatives (2-year terms), but neither can look very far forward. With representatives seemingly on a continuous campaign trail due to the short term, they’re re-election can be lost on any given issue if his constituency has a knee-jerk reaction to something and the politician in question chooses to keep a cool head. The old axiom, “cooler heads prevail” doesn’t hold true in politics.

Even senators cannot be that forward looking. For many economic issues, statistically significant results of policy changes often don’t manifest themselves for years. With approx. 1/3 of the U.S. Senate up for re-election within any given two-year period, that virtually guarantees that 1/3 of the Senators will make decisions with the same timeline as their House counterparts. It does a senator no good if the evidence that he made the correct decision doesn’t manifest until after (or even towards the end of) his campaign.

The obvious solution would be to make the terms longer, but that, too, is not without it’s downfalls. Assume for a minute that Senators had 10-year terms, and that Minnesota (my home state) had elected one last year off some knee-jerk reaction to whatever. Over the course of the year, the new senator has shown extreme incompetence and a complete disregard for his constituency. We’re potentially locked into this prick for the next 9 years. Of course, if Minnesota has an easy method to prematurely remove a politician from office, we wouldn’t have to be stuck with him. But if process to remove is too easy, the politicians will still be making decisions on a short-term view since they could be out on the curb at any minute, thus we’re no better off.

Another problem is that politicians are usually voting for or against one proposal. There isn’t much in the way of hearing 10 solutions and widdling down to a couple. Or cherry-picking the best parts of multiple proposals. Instead, one solution is proposed and voted in or voted down. If it’s voted down, we may see revisions to the proposal to get enough of the no votes to become yes votes. This setup doesn’t leave way for testing systems and monitoring the outcomes before making a decision. Thus, here is my proposal:

What if we could test out solutions in parallel and see what worked and what didn’t? Here’s how it’d work. Say the U.S. legislature agreed to testing different proposed solutions to tax reform, they’d open up the floor to proposals from individual states on ideas for, say, 6 months. After 6 months, the submitted proposals are evaluated, and 5 different methods are chosen to be tested. Let’s say Minnesota submitted a proposal for a flat tax in lieu of the current IRS tax code. For the next 5 years, people who would normally be filing taxes as Minnesota residents would be exempt from normal IRS tax code, and would instead be subject to the “flat tax,” whatever that was. At the same time, Arizona’s approval to test “no IRS filings, but to instead incorporate a higher sales tax” would be occurring in Arizona. You get the idea. Anyway, after 5 years, the results would be summarized, made public, and debated for another 3-6 months before the legislature got to pick and choose what worked “best.”

This method helps solve the (not) forward-thinking problem. If needed to appease one’s constituency, the politicians could do their usual knee-jerk reaction for the near-term while testing for better solutions in the far term. If not needed, the politicians could claim to be awaiting the results of the trials as not to make a detrimental decision for America. Let me know what you think.