Not many people outside of other Republicans watch pre-general-election debates, and fewer still--even many Republicans--don't generally watch the debate of the Ames Straw Poll. Why would they? The poll mostly attracts the most conservative and most committed supporters, which is why Ron Paul usually does well, and which is also how Michelle Bachmann managed to win the whole thing. But I, for one, am willing to vote for any candidate, and so this was an opportunity for me to see just how far right the candidates would go. Plus, I'm super excited about getting to cast my ballot this election, so I'm learning as much as I can in the run up to the biannual ritual known as voting.
Most candidates were shockingly adjusted to the new, hyper-conservative antitax-even-if-it-means-default mood that has swept up many voters. This, in part, contributed to many observers concluding that Bachmann had won. I thought that Newt Gingrich was the winner. I chose him because I thought he was the most prepared, the most articulate in presenting his ideas, and the most coherent in his thinking. However, there was a particular soundbite that won me over.
So, what did he say? A transcript provides:
"I think this super committee is about as dumb an idea as Washington has come up with in my lifetime...The idea that 523 senators and congressmen are going to sit around for four months while 12 brilliant people, mostly picked for political reasons, are going to sit in some room and brilliantly come up with a trillion dollars or force us to choose between gutting our military and accepting a tax increase is irrational...What they ought to do is scrap the committee right now, recognize it's a dumb idea, go back to regular legislative business, assign every subcommittee the task of finding savings, do it out in the open through regular legislative order and get rid of this secret phony business."
Although I'm not planning on voting for Gingrich anytime soon (but, as I said above, who knows? I'm an open person), this represents a fascinating insight into how the economy actually works in a political field where no one has any idea how to do things like bring down unemployment. But what amazingly brilliant concept is represented here? Why, it's the acceptance that the economy is not a thing in and of itself. The economy is made of things. Those things are entities--families, individuals, businesses, countries--exchanging other things, like assets, principal, capital, goods, credit, derivatives, debt, or any other financial vehicle you feel like putting in the blank.
But this represents far more profound implications than what is immediately obvious. It means more than just the obvious fact that there is no way that twelve people can possibly come up with a plan to rejigger the economy. It means that Wall Street is wrong to suppose that Ben Bernanke's decision to keep interest rates low will fix anything, as the world if finance is simply not the entire economy. It also means, though, that Ben Bernanke is wrong to try to prop up Wall Street and think that that alone will fix anything. This tells us that these omnibus bills, like Obamacare, Dodd-Frank, et al are not going to fix the economy--not alone, not together.
But most importantly, however, this means that an economic platform is actually one that is not self-aware, but instead focused on executing a product. Remember this always: the economy is made up of things, but that does not make it a thing. Most people, even smart people, dont' realize this, and it's in part economists' faults for not making this clear. The visualizations that economists use are not meant to be taken literally, or even to imply a direct relationship. Thus, satisfaction is not 100% guaranteed. You cannot "shove money into the economy," which is elastic, and if you do that inflation will make that money worthless, although the real size of it will stay the same. And if you do manage to put in enough to avoid stoking inflation, or put credit into the system using a quirky but borderline-brilliant method like QE, that doesn't mean anything if people have nothing to spend that money on, or no one wants to spend it. Alas, these are not things that they tend to make clear. The point is, things need to exchange other things while doing stuff.
Therefore, Gingrich is absolutely right; if we really want the government to help the recovery, we need less centralization in the planning process. We need cost cutting on a smaller level, with, yes, each committee and subcommittee that already exists finding savings rather than complicating things by creating a new one. And, yes, that can also mean that programs that the government actually does well in can be preserved, not just eliminating them. We can garner a lot of small efficiencies that, put together, equal a lot. Plus, if we separate each part, we make it so that we have to look at every individual initiative on its own merits, eliminating the political horse-trading that plagues debt-ridden monster bills, and set on their own, politicians may realize how stupid some of those projects are. But, most importantly, this allows each program to focus on its product, how to improve it, how to cut costs, and to evaluate its overall usefulness. And, in all, they must remember: the economy is made of things. So make sure your thing is worth keeping.
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Friday, August 26, 2011
Monday, August 8, 2011
It's Honestly Hilarious
Financial calamity has indeed ensued. S&P did warn us that we would be downgraded if our long term debt problem wasn't solved, regardless of whether or not we actually default. Never mind that it's nearly impossible to pass that type of sweeping reform across so many regions of governance in a few months. Even for people who are good at that kind of thing. In the end, S&P was the only ratings agency (obviously aside from Weiss) to downgrade America's debt from AAA to AA+, the first time ever in history since credit ratings have been issued. S&P has been on a downgrading spree ever since, reviewing anything that is backed by American T-bills. This includes over $6b of Israeli bonds and some muni bonds that risk being put on the cutting board.
The comic tragedy begins with the issue of the downgrading itself. S&P originally wanted to downgrade us based on what they imagined our debt would be. It turns out that they made a $2t mistake. Then they admitted it. Then they changed their story, saying that all along it was because America had proven that its political system, that had actually managed by the way to pass a debt deal. Sure, President Obama's speech was uninspiring, and he took a birthday/fundraiser day after the debt deal was passed, but that doesn't mean that we have no political system worth mentioning. It is indeed true that this could have been dealt with back in December when Democrats still had a vast majority. But is this really a reason to eliminate a credit rating?
Furthermore, yes, our deal admittedly has a floor of only $2.4t, which is short of the aimed goal of $4t. But part of the process is creating a 12-person panel to find future cuts, and possibly new sources of revenue. Although it will probably be pitiful and timid, there is still the chance we could hit that $4t benchmark. It is too early to downgrade us based on political seizure, because we still got done what we needed to do, and the time frame to reach that $4t goal has not yet been closed. Fear not, S&P heard our complaints about its credibility and took action. In response, S&P downgraded Berkshire Hathaway, presumably because Warren Buffet, well-known investing genius, disagreed.
The next thing that's kind of funny is the rating agency itself. Although all ratings agencies (save Weiss) dropped the ball on the subprime mortgage crisis, none did so more than S&P. Consider ACA Capital, which was involved in some muddy business to say the least; it was literally the single firm that those CDOs that crashed the market in 2008 were shuffled through. Oh, and it was rated AAA by S&P, and by S&P alone. AIG, Citi, Bear Sterns, and Lehmann would not have been able to shuffle shoddy CDOs through if S&P did not do such a shoddy job. Furthermore, as said earlier, S&P recently downgraded Berkshire Hatthaway and other similarly strong American companies just because they are American, a signifier of poor foresight. This is from the company that wants you to believe it. No, seriously.
The funniest part is the market response. No, I don't mean the huge drops in the stock market. All over the world. Or that gold, now at a new record, at its new record for yet another day in a row (although not when adjusted for inflation). Or the weakening of the dollar, especially to Switzerland's chagrin. The funniest part is that yields on treasuries have fallen. Not just on 10-years; yields on anything older than 12-month maturities. For the less economically informed, let me explain. The yield is the interest rate on a bond. If you perceive that someone is less likely to pay you back, normally you would demand more money to compensate for the risk you're taking. That's how interest rates work; if the perceived risk increases, yields should increase. Downgrades inherently mean that the rating agency foresees more risk; yields should be up. Yields are down because investors fear that the downgrade may trigger a short term, double-dip recession, but want a return later on from the place they see as the safest. Downgrading T-bills has increased the appetite for them as people seek a safe investment from the downgrade. Essentially, to seek safety from the fallout of T-bills, investors are stocking up on T-bills. If you don't see the hilarity in this, you shouldn't become an investor.
The political ramifications are enormous. There is a perceived tug of war right now between S&P and the Obama Administration for credibility. Obviously, the market doesn't trust Obama, as the market plunged as he gave his feeble speech. Yet, people are fleeing to treasuries just as S&P downgraded them. Unlike before, when people trusted the ratings agencies to a fault, there seems to have been a change in the winds. It seems as though both are losing.
In the end, I just hope that the only good that comes from this is that laws that have given ratings agencies too much power go away. How about the laws that require certain private firms to hold AAA rated securities only? Oh, a better debt deal would be nice too. I can dream, can't I?
The comic tragedy begins with the issue of the downgrading itself. S&P originally wanted to downgrade us based on what they imagined our debt would be. It turns out that they made a $2t mistake. Then they admitted it. Then they changed their story, saying that all along it was because America had proven that its political system, that had actually managed by the way to pass a debt deal. Sure, President Obama's speech was uninspiring, and he took a birthday/fundraiser day after the debt deal was passed, but that doesn't mean that we have no political system worth mentioning. It is indeed true that this could have been dealt with back in December when Democrats still had a vast majority. But is this really a reason to eliminate a credit rating?
Furthermore, yes, our deal admittedly has a floor of only $2.4t, which is short of the aimed goal of $4t. But part of the process is creating a 12-person panel to find future cuts, and possibly new sources of revenue. Although it will probably be pitiful and timid, there is still the chance we could hit that $4t benchmark. It is too early to downgrade us based on political seizure, because we still got done what we needed to do, and the time frame to reach that $4t goal has not yet been closed. Fear not, S&P heard our complaints about its credibility and took action. In response, S&P downgraded Berkshire Hathaway, presumably because Warren Buffet, well-known investing genius, disagreed.
The next thing that's kind of funny is the rating agency itself. Although all ratings agencies (save Weiss) dropped the ball on the subprime mortgage crisis, none did so more than S&P. Consider ACA Capital, which was involved in some muddy business to say the least; it was literally the single firm that those CDOs that crashed the market in 2008 were shuffled through. Oh, and it was rated AAA by S&P, and by S&P alone. AIG, Citi, Bear Sterns, and Lehmann would not have been able to shuffle shoddy CDOs through if S&P did not do such a shoddy job. Furthermore, as said earlier, S&P recently downgraded Berkshire Hatthaway and other similarly strong American companies just because they are American, a signifier of poor foresight. This is from the company that wants you to believe it. No, seriously.
The funniest part is the market response. No, I don't mean the huge drops in the stock market. All over the world. Or that gold, now at a new record, at its new record for yet another day in a row (although not when adjusted for inflation). Or the weakening of the dollar, especially to Switzerland's chagrin. The funniest part is that yields on treasuries have fallen. Not just on 10-years; yields on anything older than 12-month maturities. For the less economically informed, let me explain. The yield is the interest rate on a bond. If you perceive that someone is less likely to pay you back, normally you would demand more money to compensate for the risk you're taking. That's how interest rates work; if the perceived risk increases, yields should increase. Downgrades inherently mean that the rating agency foresees more risk; yields should be up. Yields are down because investors fear that the downgrade may trigger a short term, double-dip recession, but want a return later on from the place they see as the safest. Downgrading T-bills has increased the appetite for them as people seek a safe investment from the downgrade. Essentially, to seek safety from the fallout of T-bills, investors are stocking up on T-bills. If you don't see the hilarity in this, you shouldn't become an investor.
The political ramifications are enormous. There is a perceived tug of war right now between S&P and the Obama Administration for credibility. Obviously, the market doesn't trust Obama, as the market plunged as he gave his feeble speech. Yet, people are fleeing to treasuries just as S&P downgraded them. Unlike before, when people trusted the ratings agencies to a fault, there seems to have been a change in the winds. It seems as though both are losing.
In the end, I just hope that the only good that comes from this is that laws that have given ratings agencies too much power go away. How about the laws that require certain private firms to hold AAA rated securities only? Oh, a better debt deal would be nice too. I can dream, can't I?
Sunday, July 3, 2011
A More Intelligent Tax System
Taxes. They might destroy our credit rating. Not because of the problems with raising revenue, although they are many (a combination of a poor recovery and a shrinking tax base). No, because Republicans say they won't raise the debt ceiling if it involves new taxes, or getting rid of old reductions.
Inevitably, a flat tax, although known to increase revenues as per the Laffer Curve, is politically unviable. So how can we make the income tax make more sense in an era of government assuming more functions? Today, I would like to propose some features of what this new system may look like.
The first problem is that we have too many deductions. Here's Title 26, the tax code. It's very, very long. A lot of it is deductions. I imagine that there are thousands of them. Not only does this deprive the government of revenue, it creates mini-bubbles by artificially inflating demand for products that are ailing on their own, or that the government thinks is worth convincing people to buy (like this tax credit for hybrids). These deductions are also, in large part, responsible for 47% of Americans paying no income tax. The result of this fact, combined with an economic downturn, is a violation of Hauser's law, with tax receipts making up only 15% of GDP, a size so small it has not been seen since around 1950. After all, you don't think that 47% of American live in poverty, do you? Corporate welfare is huge too. Ethanol, which can harm the engines of old cars (which are owned mostly by the poor, you know) and is not really good for the environment, cost taxpayers $6b, all while increasing food prices. Let's not even get started on oil. Not only do these deductions decrease revenue, they steer behavior. That creates mini-bubbles that eventually must pop as artificial demand eventually becomes deflated and economic activity shifts elsewhere, creating a collapse in an artificially inflated industry that has grown larger than it normally would. That itself, of course, could these days trigger a bailout or massive restructuring. It would be remiss to also ignore the effects of affecting behavior in a free market, possibly creating unforeseen negative (or positive) side effects, diverting investment from more effective alternatives, and removing capital or assets from other, more productive sectors, presuming non-Keynesian non-deficit spending.
The second problem is that our corporate tax rate is too high. The world is changing all around us. Our corporate tax rate is very high. The normal tax rate is 35% (highest in the world), the combined corporate rate is 39.2% (second highest), and the effective rate is 27.6% (fourth highest). In other words, no matter how you measure it, we come in either at or close to the top. In an age where other countries are mercantile in headhunting, this is not something we can afford.
And, lastly, let's deal with the problem of individual rates. Many claim that allowing the Bush tax cuts to expire would be a tax on small businesses. This is, in a way, true; about 2/3 of small business owners keep their business in their own finances, which makes them reach the next bracket even though they aren't taking home all that money. Small businesses are responsible for a very large amount of job growth, so that is not what we want right now in a jobless recovery. Plus, it's not even a "millionaire tax"; only 2% of the top 10% bracket are even millionaires. The rich also, obviously, pay disproportionately for the government. Whether or not this is fair depends on a person's leanings; whether or not this is a fact is indisputable. Furthermore, those making $10m or more get only about 19% of their income in the form of actual, well, income. That means that to make it fair, they really should have a higher rate so that the same percentage of their true income is actually taxed, rather than a smaller portion. Because a flat tax is politically impossible and just letting the Bush tax cuts expire would not be wise for the aforementioned reasons, we should make a new tax bracket starting at those making somewhere between $2m-10m (I would start it at $10m). This allows for more flexibility in deciding future rates. It also allows us to start making more money without hurting those who help us generate employment. And, of course, all of these things must be flexible. We must be able to adjust the rate and income of each bracket; perhaps by tying it all to wage inflation, or as a certain coefficient of the mean or median wage of Americans. This would be something for more advanced economists to decide. My recommendation is making income tax brackets, rather than a fixed income, a particular coefficient of the median income (as it stands, that is roughly $50,000 per year; thus, the coefficients would be roughly .25x for poverty, 1x for normal, 2x for the next bracket, 5x, and 200x). Not only does this particularly underscore the philosophy behind everything, this makes it immediately fluid, as the median income is reevaluated every year.
In all, the solution should be apparent; our system is too complicated, while also being too one-size-fits all. We have tried to overextend ourselves, but in doing so have failed. If we want to have some differentiation, it should be finer to better correspond with economic realities. If we want economic growth, we should stop burdening the economy.
Inevitably, a flat tax, although known to increase revenues as per the Laffer Curve, is politically unviable. So how can we make the income tax make more sense in an era of government assuming more functions? Today, I would like to propose some features of what this new system may look like.
The first problem is that we have too many deductions. Here's Title 26, the tax code. It's very, very long. A lot of it is deductions. I imagine that there are thousands of them. Not only does this deprive the government of revenue, it creates mini-bubbles by artificially inflating demand for products that are ailing on their own, or that the government thinks is worth convincing people to buy (like this tax credit for hybrids). These deductions are also, in large part, responsible for 47% of Americans paying no income tax. The result of this fact, combined with an economic downturn, is a violation of Hauser's law, with tax receipts making up only 15% of GDP, a size so small it has not been seen since around 1950. After all, you don't think that 47% of American live in poverty, do you? Corporate welfare is huge too. Ethanol, which can harm the engines of old cars (which are owned mostly by the poor, you know) and is not really good for the environment, cost taxpayers $6b, all while increasing food prices. Let's not even get started on oil. Not only do these deductions decrease revenue, they steer behavior. That creates mini-bubbles that eventually must pop as artificial demand eventually becomes deflated and economic activity shifts elsewhere, creating a collapse in an artificially inflated industry that has grown larger than it normally would. That itself, of course, could these days trigger a bailout or massive restructuring. It would be remiss to also ignore the effects of affecting behavior in a free market, possibly creating unforeseen negative (or positive) side effects, diverting investment from more effective alternatives, and removing capital or assets from other, more productive sectors, presuming non-Keynesian non-deficit spending.
The second problem is that our corporate tax rate is too high. The world is changing all around us. Our corporate tax rate is very high. The normal tax rate is 35% (highest in the world), the combined corporate rate is 39.2% (second highest), and the effective rate is 27.6% (fourth highest). In other words, no matter how you measure it, we come in either at or close to the top. In an age where other countries are mercantile in headhunting, this is not something we can afford.
And, lastly, let's deal with the problem of individual rates. Many claim that allowing the Bush tax cuts to expire would be a tax on small businesses. This is, in a way, true; about 2/3 of small business owners keep their business in their own finances, which makes them reach the next bracket even though they aren't taking home all that money. Small businesses are responsible for a very large amount of job growth, so that is not what we want right now in a jobless recovery. Plus, it's not even a "millionaire tax"; only 2% of the top 10% bracket are even millionaires. The rich also, obviously, pay disproportionately for the government. Whether or not this is fair depends on a person's leanings; whether or not this is a fact is indisputable. Furthermore, those making $10m or more get only about 19% of their income in the form of actual, well, income. That means that to make it fair, they really should have a higher rate so that the same percentage of their true income is actually taxed, rather than a smaller portion. Because a flat tax is politically impossible and just letting the Bush tax cuts expire would not be wise for the aforementioned reasons, we should make a new tax bracket starting at those making somewhere between $2m-10m (I would start it at $10m). This allows for more flexibility in deciding future rates. It also allows us to start making more money without hurting those who help us generate employment. And, of course, all of these things must be flexible. We must be able to adjust the rate and income of each bracket; perhaps by tying it all to wage inflation, or as a certain coefficient of the mean or median wage of Americans. This would be something for more advanced economists to decide. My recommendation is making income tax brackets, rather than a fixed income, a particular coefficient of the median income (as it stands, that is roughly $50,000 per year; thus, the coefficients would be roughly .25x for poverty, 1x for normal, 2x for the next bracket, 5x, and 200x). Not only does this particularly underscore the philosophy behind everything, this makes it immediately fluid, as the median income is reevaluated every year.
In all, the solution should be apparent; our system is too complicated, while also being too one-size-fits all. We have tried to overextend ourselves, but in doing so have failed. If we want to have some differentiation, it should be finer to better correspond with economic realities. If we want economic growth, we should stop burdening the economy.
Tuesday, June 14, 2011
Weiner's Weiner (Yes, Penis Jokes)
Usually, my op-eds are heavily notated columns on economic issues, not political ones (at best, political-cum-economics). However, there is one issue that I feel deserves attention on this blog as a result of its implications. That is the Anthony Weiner scandal, in which a Congressman sent a risque picture to a female student. I can't say that I like Weiner, but he should not be criticized for something he did not do. We should therefore refrain from rash accusations. However, let us look at what those accusations are, and what merit they hold.
As I am sure readers of this blog know, I am a Libertarian. So I don't see much of a problem with the fact that Congressman Anthony Weiner (D-NY) took a picture of his shwang. While I don't go to the extent that the French do (allowing DSK to get away with what I consider sexual harassment and abuse of power for sex), I do believe that there should be no censuring for extramarital affairs or related activities. That is Weiner's own business, and it is not Congress' or any government body's job to legislate and enforce morality. Its only obligation is to ensure that no one's freedoms are infringed upon, be it through fraud, physical harm, or related activities. It is a shame that this could harm his election prospects; it's relatively harmless and just a personal failing. Once again referring to the French, and reiterating that I think they allow far too much transgressions with a failure to draw the line between abuse and affairs, they are not out of place to call us Puritan with regards to our leaders. However, Weiner has committed one or maybe two crimes.
The first is lying. This one is very clear-cut and obviously true. At first, Weiner said that he did not send the picture, saying that he had been hacked. He then said that he would have his own private investigation at his own expense. Weiner had the right to decline a public investigation, citing a desire to cut public costs. Fair enough at first, but now we can see that it is most likely to avoid someone who is not he revealing what he had done. Also, his paycheck is from the public, so not completely separated. While he eventually came clean, he lied to us for a week. Lying on a public forum is not really acceptable.
The graver offense, however, is that he may have been harassing the woman in question. This one is less clear. It is one thing to have an affair, which is a private matter. However, if it turns out that he was sexually harassing a woman, this moves into actual harm territory. Once again comparing Weiner to DSK, he will have to answer for his actions if they moved to harassment from flirting. He should not be let go because of his status as a Congressman. But, there is a lot we don't know. There has thus far been little to no information about his relationship with this student prior to this picture being released. He may very well have just been flirting. If it turns out that it was just flirting, of course he should be allowed to be on his merry way. If not, well...time will tell. Hopefully some clarification will emerge while Weiner is at his treatment. For now, let's just sit and watch.
As I am sure readers of this blog know, I am a Libertarian. So I don't see much of a problem with the fact that Congressman Anthony Weiner (D-NY) took a picture of his shwang. While I don't go to the extent that the French do (allowing DSK to get away with what I consider sexual harassment and abuse of power for sex), I do believe that there should be no censuring for extramarital affairs or related activities. That is Weiner's own business, and it is not Congress' or any government body's job to legislate and enforce morality. Its only obligation is to ensure that no one's freedoms are infringed upon, be it through fraud, physical harm, or related activities. It is a shame that this could harm his election prospects; it's relatively harmless and just a personal failing. Once again referring to the French, and reiterating that I think they allow far too much transgressions with a failure to draw the line between abuse and affairs, they are not out of place to call us Puritan with regards to our leaders. However, Weiner has committed one or maybe two crimes.
The first is lying. This one is very clear-cut and obviously true. At first, Weiner said that he did not send the picture, saying that he had been hacked. He then said that he would have his own private investigation at his own expense. Weiner had the right to decline a public investigation, citing a desire to cut public costs. Fair enough at first, but now we can see that it is most likely to avoid someone who is not he revealing what he had done. Also, his paycheck is from the public, so not completely separated. While he eventually came clean, he lied to us for a week. Lying on a public forum is not really acceptable.
The graver offense, however, is that he may have been harassing the woman in question. This one is less clear. It is one thing to have an affair, which is a private matter. However, if it turns out that he was sexually harassing a woman, this moves into actual harm territory. Once again comparing Weiner to DSK, he will have to answer for his actions if they moved to harassment from flirting. He should not be let go because of his status as a Congressman. But, there is a lot we don't know. There has thus far been little to no information about his relationship with this student prior to this picture being released. He may very well have just been flirting. If it turns out that it was just flirting, of course he should be allowed to be on his merry way. If not, well...time will tell. Hopefully some clarification will emerge while Weiner is at his treatment. For now, let's just sit and watch.
Friday, June 10, 2011
It's the Debt Ceiling Again
Liked the budget scare? Wish you could get more economic catastrophe, but without waiting so long? Well, you're in luck. We hit the debt ceiling of roughly $14.3t on May 31, and we have until August 2 to fix it before we default.
First, the obvious question: how can we still be spending money when we hit our debt limit? Simply, we have ways to squeeze money out of our books. Part of this involves the fact that a huge part of our debt is owed to other American government entities, so we can just not pay ourselves.
Debt is a huge problem here in America. The publicly held debt in America (using the gross debt, $14.29t, for ease of calculation), using our GDP size of $14.12t, our debt-GDP ratio is 101.2%. The private sector is considered worse...so they say. The problem is, we can't agree on how leveraged we are. Credit Suisse calls the chart calling the private sector 350% leveraged is "meaningless." Bob Rodriguez, the genius who is currently freaking out about our debt, said in a rare interview that he believes that debt in America is underreported and is actually at over 500% of GDP. One thing big iconoclast investors agree on (hint: it's not the actual size of the debt), it's that it's unsustainable; as Jim Rogers, the brilliant mind who cofounded the Quantum Funds with George Soros, has said, we need to "take a chainsaw to spending in the United States."
Of course, regardless of our debt, we must know why default is crucial. If we were to default, it would have hugely catastrophic consequences. Timothy Geithner, the Treasury Secretary, says that the consequences would be "worse than the financial crisis." In the long run, I agree. America's strength in part comes from our strong power with credit an interest rates. We pay next to nothing on our debts; look at the difference between American and German bonds. On 10 year bonds, America pays 2.7%, while Germany pays 6.9%, despite the much lower debt-GDP ratio. This represents huge confidence in America, arguably unfoundedly. This won't last forever, and it isn't. Already, the major ratings agencies are starting to get concerned.
S&P has changed its outlook for America's AAA rating (shared only by 18 other countries) to "negative," citing disbelief in America's ability to come to a resolution. Moody's has made similar statements, but less severely, saying that for now, America is stable. Weiss, a smaller but up-and-coming agency that predicted Lehmann's collapse when other big agencies failed, has said that America's debt is already junk. Fitch, a huge ratings agency, agrees, which is an even greater concern. Our low interest rates are in part what has made us a powerhouse Of course, every one of these warnings comes with a very big caveat. They will only occur if there is an actual default or failure to control America's debt; in other words, if a credible plan comes forth, these points will all dissolve into thin air.
So, get worried. The recent talks between Boehner and Obama were said to be "productive," but that they went nowhere. Some are worried that an accord will not come through due to huge ideological differences. Alan Greenspan and a growing chorus of others think that we need to raise taxes to cover some of the difference, so you can basically count on Boehner, who said he will accept no new taxes, to reject any such deal. Don't look to President Obama nor Representative Ryan for leadership either. Their plans only cut off future spending; in other words, debt still rises under both of their plans. While Ryan's plan was the first serious attempt to even look at debt, it was an incomplete and pitiful one. Trying to ram it through without any discussion is not a way to make investors happy, especially when it's shot down by the moderates in the Senate. A show vote knocking down an unconditional debt ceiling increase by $2.4t showed just how looney Congress is. The Congressman who proposed the legislation is Dave Camp (R-MI), said that "the legislation I've introduced will and must fail." Yes, you read it right; Camp proposed legislation for the express purpose of showing he would vote against it. We are officially crazy.
Boehner wants the government to cut "trillions, not billions," in a shrewd reference to the whining of the budget. However, what he said next was even more interesting. He said that it would be "irresponsible" to let us default on our debts...obviously. But, he said, it would be "more irresponsible" to raise the debt ceiling without any serious changes in our spending. In other words, a short term default is preferable to a long term inviability of servicing our debts. This is not a completely foolish proposition. Stanley Druckenmiller, a truly legendary fund manager, gave a rare interview to the Wall Street Journal to say exactly that. He said that "in 20 years, people aren't going to ask whether we delayed an interest payment for 6 days. They're going to ask whether or not we got our house in order." The concern is a Greece scenario (which is, by the way, going terribly).
Frankly, raising taxes won't do so much. There's something called Hauser's law, which is the interesting fact that regardless of rates, the tax base, etc, tax revenue post-WWII tends to even out to 19% of GDP (with slight fluctuations, of course). However, it is very low right now at only 15% of GDP. It would make more sense to lower rates and expand the tax base. After all, nearly half of Americans, or 47%, have a net federal income liability of zero, which costs way more than the Bush tax cuts. The cause is the various deductions we have in place as an attempt to use the tax code as a social engineering tool. Even if we were to raise taxes, just the unfunded parts of Social Security and the various sections of Medicare (that's right, even excluding interest payments and Medicaid), we need to somehow find $106.8t. That's assuming that President Obama's rosy numbers pay out. They probably won't. When Medicare passed, we expected it to cost $12b by 1990 when it actually cost $108b (no one could have predicted the explosive inflation under Carter and Reagan, however, so I adjusted it for inflation from 1965-1990; it ended up being a $74b price tag, which was still off but not nearly as much as is often portrayed). Raising the income tax won't make as much of a difference as estimated, either. It will only raise tax revenues from 19.6% in 2020 to 20%. Plus, as Veronique de Rugy, a senior research fellow at the Mercatus Institute, points out, the richest Americans (those worth $10m or more) only have about 19% of their income in the form of "income"; most of it is capital gains or some other non-income asset. So, right now, we're taxing 19% of 19% of their wealth, or about 3.61% of it (I am not not counting the capital gains tax, which is much higher). Talk of the income tax never talks about increased investment as a result, either, which means that the trillion dollar price tag of the Bush tax cuts are often overstated.
While I agree with Druckenmiller (and, frankly, was quite happy to see that someone finally agreed with me when this came out), I do not know if the rest of the world will see it that way. Interest rates reflect perceived risk not actual risk, for which there is no index and never will be. I fear that investors will rush in fear to conclusions and not realize the wisdom that Druckenmiller espouses, demanding higher rates for a risk that has actually been mitigated. I also fear that we will not get our debt under control. Newt Gingrich called Ryan's plan "right-wing social engineering" rather than a plan to control the debt and deficit; I agree. We'd be in less of a hole than with Obama's plan, but our hole still gets deeper under Ryan; he only slows spending. The only thing that changes is that we pay our insurance premiums to a private company instead of the government with vouchers, which creates growth as illusory as Medicare does. Even if we come to a deal (and I'm sure we will), it will probably not fix our problems. That kind of deal would take a year, if not more, to hammer out. I believe that our best bet is not one giant omnibus bill, but many small bills that address a single issue at a time. That way, we can fix some things, and people can vote based on single issues and not ignore 20 issues because 1 thing they don't like is in this huge bill. While Herman Cain's statement on bill length was more humorous than serious, I think he actually had the right idea. We also need to fix our pitiful education system so that we can innovate ourselves into a bigger economy and, thus, restored confidence and increased ability to generate revenue. Ben Bernanke has at least finally admitted that "monetary policy cannot be a panacea." In the end, the left-wing social engineering projects have saddled us with too great a debt as they tried to synthesize prosperity. We must now suffer the consequences of their actions. And so must our children. Perhaps even more.
First, the obvious question: how can we still be spending money when we hit our debt limit? Simply, we have ways to squeeze money out of our books. Part of this involves the fact that a huge part of our debt is owed to other American government entities, so we can just not pay ourselves.
Debt is a huge problem here in America. The publicly held debt in America (using the gross debt, $14.29t, for ease of calculation), using our GDP size of $14.12t, our debt-GDP ratio is 101.2%. The private sector is considered worse...so they say. The problem is, we can't agree on how leveraged we are. Credit Suisse calls the chart calling the private sector 350% leveraged is "meaningless." Bob Rodriguez, the genius who is currently freaking out about our debt, said in a rare interview that he believes that debt in America is underreported and is actually at over 500% of GDP. One thing big iconoclast investors agree on (hint: it's not the actual size of the debt), it's that it's unsustainable; as Jim Rogers, the brilliant mind who cofounded the Quantum Funds with George Soros, has said, we need to "take a chainsaw to spending in the United States."
Of course, regardless of our debt, we must know why default is crucial. If we were to default, it would have hugely catastrophic consequences. Timothy Geithner, the Treasury Secretary, says that the consequences would be "worse than the financial crisis." In the long run, I agree. America's strength in part comes from our strong power with credit an interest rates. We pay next to nothing on our debts; look at the difference between American and German bonds. On 10 year bonds, America pays 2.7%, while Germany pays 6.9%, despite the much lower debt-GDP ratio. This represents huge confidence in America, arguably unfoundedly. This won't last forever, and it isn't. Already, the major ratings agencies are starting to get concerned.
S&P has changed its outlook for America's AAA rating (shared only by 18 other countries) to "negative," citing disbelief in America's ability to come to a resolution. Moody's has made similar statements, but less severely, saying that for now, America is stable. Weiss, a smaller but up-and-coming agency that predicted Lehmann's collapse when other big agencies failed, has said that America's debt is already junk. Fitch, a huge ratings agency, agrees, which is an even greater concern. Our low interest rates are in part what has made us a powerhouse Of course, every one of these warnings comes with a very big caveat. They will only occur if there is an actual default or failure to control America's debt; in other words, if a credible plan comes forth, these points will all dissolve into thin air.
So, get worried. The recent talks between Boehner and Obama were said to be "productive," but that they went nowhere. Some are worried that an accord will not come through due to huge ideological differences. Alan Greenspan and a growing chorus of others think that we need to raise taxes to cover some of the difference, so you can basically count on Boehner, who said he will accept no new taxes, to reject any such deal. Don't look to President Obama nor Representative Ryan for leadership either. Their plans only cut off future spending; in other words, debt still rises under both of their plans. While Ryan's plan was the first serious attempt to even look at debt, it was an incomplete and pitiful one. Trying to ram it through without any discussion is not a way to make investors happy, especially when it's shot down by the moderates in the Senate. A show vote knocking down an unconditional debt ceiling increase by $2.4t showed just how looney Congress is. The Congressman who proposed the legislation is Dave Camp (R-MI), said that "the legislation I've introduced will and must fail." Yes, you read it right; Camp proposed legislation for the express purpose of showing he would vote against it. We are officially crazy.
Boehner wants the government to cut "trillions, not billions," in a shrewd reference to the whining of the budget. However, what he said next was even more interesting. He said that it would be "irresponsible" to let us default on our debts...obviously. But, he said, it would be "more irresponsible" to raise the debt ceiling without any serious changes in our spending. In other words, a short term default is preferable to a long term inviability of servicing our debts. This is not a completely foolish proposition. Stanley Druckenmiller, a truly legendary fund manager, gave a rare interview to the Wall Street Journal to say exactly that. He said that "in 20 years, people aren't going to ask whether we delayed an interest payment for 6 days. They're going to ask whether or not we got our house in order." The concern is a Greece scenario (which is, by the way, going terribly).
Frankly, raising taxes won't do so much. There's something called Hauser's law, which is the interesting fact that regardless of rates, the tax base, etc, tax revenue post-WWII tends to even out to 19% of GDP (with slight fluctuations, of course). However, it is very low right now at only 15% of GDP. It would make more sense to lower rates and expand the tax base. After all, nearly half of Americans, or 47%, have a net federal income liability of zero, which costs way more than the Bush tax cuts. The cause is the various deductions we have in place as an attempt to use the tax code as a social engineering tool. Even if we were to raise taxes, just the unfunded parts of Social Security and the various sections of Medicare (that's right, even excluding interest payments and Medicaid), we need to somehow find $106.8t. That's assuming that President Obama's rosy numbers pay out. They probably won't. When Medicare passed, we expected it to cost $12b by 1990 when it actually cost $108b (no one could have predicted the explosive inflation under Carter and Reagan, however, so I adjusted it for inflation from 1965-1990; it ended up being a $74b price tag, which was still off but not nearly as much as is often portrayed). Raising the income tax won't make as much of a difference as estimated, either. It will only raise tax revenues from 19.6% in 2020 to 20%. Plus, as Veronique de Rugy, a senior research fellow at the Mercatus Institute, points out, the richest Americans (those worth $10m or more) only have about 19% of their income in the form of "income"; most of it is capital gains or some other non-income asset. So, right now, we're taxing 19% of 19% of their wealth, or about 3.61% of it (I am not not counting the capital gains tax, which is much higher). Talk of the income tax never talks about increased investment as a result, either, which means that the trillion dollar price tag of the Bush tax cuts are often overstated.
While I agree with Druckenmiller (and, frankly, was quite happy to see that someone finally agreed with me when this came out), I do not know if the rest of the world will see it that way. Interest rates reflect perceived risk not actual risk, for which there is no index and never will be. I fear that investors will rush in fear to conclusions and not realize the wisdom that Druckenmiller espouses, demanding higher rates for a risk that has actually been mitigated. I also fear that we will not get our debt under control. Newt Gingrich called Ryan's plan "right-wing social engineering" rather than a plan to control the debt and deficit; I agree. We'd be in less of a hole than with Obama's plan, but our hole still gets deeper under Ryan; he only slows spending. The only thing that changes is that we pay our insurance premiums to a private company instead of the government with vouchers, which creates growth as illusory as Medicare does. Even if we come to a deal (and I'm sure we will), it will probably not fix our problems. That kind of deal would take a year, if not more, to hammer out. I believe that our best bet is not one giant omnibus bill, but many small bills that address a single issue at a time. That way, we can fix some things, and people can vote based on single issues and not ignore 20 issues because 1 thing they don't like is in this huge bill. While Herman Cain's statement on bill length was more humorous than serious, I think he actually had the right idea. We also need to fix our pitiful education system so that we can innovate ourselves into a bigger economy and, thus, restored confidence and increased ability to generate revenue. Ben Bernanke has at least finally admitted that "monetary policy cannot be a panacea." In the end, the left-wing social engineering projects have saddled us with too great a debt as they tried to synthesize prosperity. We must now suffer the consequences of their actions. And so must our children. Perhaps even more.
Sunday, May 22, 2011
A Case Study
While Google, a private company, is working on testing a 1Gb/s connection for a possible future rollout, the government of Wilson, North Carolina is trying to make the 100 Mb/s sort more available by charging $300 a month, with a more reasonable $37 for 10 Mb/s (when paired with a cable service, too). Time Warner, of course, isn't happy. The claim: undercutting Time Warner's business by creating an uncompetitive government entity that can take a loss. Greenlight's supporters claim that they are providing a cheap alternative for a crucial commodity, and that it is fine to subsidize such a thing.
Of course, internet usage is not a commodity. For the economically uninformed, a commodity is "a comparatively homogeneous product that can typically be bought in bulk." For those paying attention, a service does not count. Although cruel, a butler can be considered a commodity because he is a physical product; any service that he provides is not. Even so, the internet is not on the CPI, the official US Government index of consumer commodities that it recognizes.
Greenlight is an interesting case study in demanding that the government take over a place. On the one hand, this seems like a good thing. America is 9th on broadband adoption and download speeds of the OECD countries. This service is, by some measures, cheaper than other services. And some pretty big names including, say, the guy who invented the internet, argue that it is a basic human right. The rhetoric is nearly desperate, with the governor, Bev Perdue, asking for "rules that not only promote fairness but also allow for the greatest number of high quality and affordable broadband options for consumers." Ouch. That puts Time Warner, I'm guessing, in the not "affordable" or "high quality" brackets.
Of course, this rests upon your definition of the word "affordable." While many claim that $300 100 Mb/s is quite an achievement for consumers, this is not the case, as it was always aimed towards businesses, and a landmark study by the John Locke Foundation shows that not only is it more expensive than what most companies pay for comparable access, it is losing money. That amount is $1.4 million this year. So, it is not quite "affordable" in the sense that it is sustainable. It is affordable like the guy across the street giving away his hose; it won't be there tomorrow, but it was nice while it lasted.
The need for government to step in is exaggerated. The broadband problem was originally created when the FCC changed ISPs to no longer be "common carriers." This saved them from Title II competition laws. Today, they are trying to fix it, but for now, it is a government-branded problem. The statistic regarding our speed is also unfairly cited without being analyzed. America is also the country that invented the internet, which means that it needs the capital to overhaul old infrastructure. On the other hand, other countries had more free capital to invest in new systems. Likewise, look at the actual size of America when compared to the other countries that beat it. With the exception of Canada (most of which is unpopulated), America is by far the largest of the top 10. Thus, it must sacrifice some speed for penetration, and even then penetration must be limited due to the sheer size of the country.
And how is Wilson going to pay for Greenlight? My bet is either taxes or muni bonds. Greenlight bonds don't sound too bad, but it's still going to need capital to pay that interest rate, which comes from, inevitably, taxes. In other words, someone is going to be forced to subsidize someone's internet. Oh well. Can't expect anything else, better or worse.
At least the government isn't suing a company for wanting to build a factory in a different state...Wait, seriously?
Of course, internet usage is not a commodity. For the economically uninformed, a commodity is "a comparatively homogeneous product that can typically be bought in bulk." For those paying attention, a service does not count. Although cruel, a butler can be considered a commodity because he is a physical product; any service that he provides is not. Even so, the internet is not on the CPI, the official US Government index of consumer commodities that it recognizes.
Greenlight is an interesting case study in demanding that the government take over a place. On the one hand, this seems like a good thing. America is 9th on broadband adoption and download speeds of the OECD countries. This service is, by some measures, cheaper than other services. And some pretty big names including, say, the guy who invented the internet, argue that it is a basic human right. The rhetoric is nearly desperate, with the governor, Bev Perdue, asking for "rules that not only promote fairness but also allow for the greatest number of high quality and affordable broadband options for consumers." Ouch. That puts Time Warner, I'm guessing, in the not "affordable" or "high quality" brackets.
Of course, this rests upon your definition of the word "affordable." While many claim that $300 100 Mb/s is quite an achievement for consumers, this is not the case, as it was always aimed towards businesses, and a landmark study by the John Locke Foundation shows that not only is it more expensive than what most companies pay for comparable access, it is losing money. That amount is $1.4 million this year. So, it is not quite "affordable" in the sense that it is sustainable. It is affordable like the guy across the street giving away his hose; it won't be there tomorrow, but it was nice while it lasted.
The need for government to step in is exaggerated. The broadband problem was originally created when the FCC changed ISPs to no longer be "common carriers." This saved them from Title II competition laws. Today, they are trying to fix it, but for now, it is a government-branded problem. The statistic regarding our speed is also unfairly cited without being analyzed. America is also the country that invented the internet, which means that it needs the capital to overhaul old infrastructure. On the other hand, other countries had more free capital to invest in new systems. Likewise, look at the actual size of America when compared to the other countries that beat it. With the exception of Canada (most of which is unpopulated), America is by far the largest of the top 10. Thus, it must sacrifice some speed for penetration, and even then penetration must be limited due to the sheer size of the country.
And how is Wilson going to pay for Greenlight? My bet is either taxes or muni bonds. Greenlight bonds don't sound too bad, but it's still going to need capital to pay that interest rate, which comes from, inevitably, taxes. In other words, someone is going to be forced to subsidize someone's internet. Oh well. Can't expect anything else, better or worse.
At least the government isn't suing a company for wanting to build a factory in a different state...Wait, seriously?
Sunday, May 8, 2011
Guest article on Truth Be Told
My friend, Ami Fields-Meyer, writes a very eloquent blog called Truth Be Told. While it is of the liberal inclination, he is very intelligent and I thus have great respect for him. He has a segment called Teen Voice, where teenagers share their various opinions on similarly varied subjects. My article is an analysis on enhanced interrogation techniques. Scroll down to see it. I cannot post a link to just my piece, so you will be forced to see, if not read, the other posts. Oh dear.
http://tbtpolitics.com/teenvoice/
Here is the transcript:
http://tbtpolitics.com/teenvoice/
Here is the transcript:
While I am not President Obama’s biggest fan, one thing I was glad about was that, under Obama, torture wasn’t in the news every day. I was saturated with it under the Bush administration, and I was getting sick of it. Now – with the killing of Osama bin Laden by Navy SEALs – my lull has ended and torture is in the news again because such enhanced interrogation techniques may have been useful in finding this vicious killer. We must ask ourselves now, once again: is torture useful in national security?
First, I want to make sure that we separate “Gitmo” from this debate. I unequivocally think that we need to keep the worst terrorists at Guantanamo Bay because – on the off chance that there is a breakout – the most dangerous of offenders is in a geographically isolated location where he will starve to death rather than be able to inflict harm on Americans on American soil. Glad we’re done with that.
For those with moral compunctions regarding torture, if you are against it, this debate is over. Nothing will ever convince you. For those like me who believe that, in war, if it is practical it is acceptable, this becomes a very perplexing issue because the usefulness of such actions is nebulous, at best.
It is not clear how useful torture was regarding the capture of bin Laden. This is because I’ve read conflicting statements. Peter King – of the House Committee on Homeland Security – says that torture helped, while Dianne Feinstein – of the Senate Intelligence Committee – claims that it did not. What this tells me from my years of reading disparate sources to find the correct middle ground is that a small piece of intelligence fit in with a tapestry of other intelligence that helped to find bin Laden a few years later. In a world where intelligence is hard to come by, this seems like a win for torture on practicality.
However, I am still doubtful. Most torture-obtained intelligence is seldom used, according to what I’ve read, and even then usually ignored unless some other type of intelligence corroborates, as a result of its general unreliability. This tells me that we are not really learning much that we couldn’t find out anyways, and that verification actually slows down the process of acting on new information. That America, home of the free and land of the brave, engages in torture is also used as effective propaganda to inspire otherwise on-the-fence would-be terrorists. We should also consider the massive amount of capital that could have gone towards traditional, more successful intelligence gathering but was diverted towards sustaining and covering up the goings-on at Guantanamo Bay.
To me, it seems as though we are not getting a good ROI on our investment in enhanced interrogation. When I think about it, I don’t understand why we tortured anyways. Our Cold War method of espionage was consistently ridiculously successful, and we knew that people will admit to anything eventually to end the pain they are forced to endure; take John McCain, who famously publicly denounced America after years of Vietnamese torture despite his obvious disinclination towards that opinion. There is no reason that the intelligence regarding bin Laden was any different than any other intelligence; thus, as outlined here, it is doubtful to me that bin Laden was found any earlier as a result of information yielded by torture.
As I said before, I have no moral issue with torturing the enemy if it undoubtedly saves lives, but as an investor, I am uncomfortable with the risk we are exposing ourselves to in exchange for what seems like a meager and uncertain return.
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