:: The Boys Weekend Journal ::

Discussion: Progressive Taxes

Dave and I had a great discussion at lunch today regarding progressive taxation (amongst other topics), and he had a fantastic argument that I had never heard before. Just to be sure, progressive taxation (in comparison to proprotional taxation) is where the rate of taxation, not just the amount of the tax, increases with wealth or salary. (For a broad overview, see here). Anywho, Dave's argument for progressive taxation is that there is value in maintaining the existing structure and stability of a society, and the wealthy value that stability more than the poor or middle-class, so they should pay more to ensure that stability and structure. If chaos or revolution erupted, the wealthy might lose their relative status through a redistribution of wealth, so they have a vested interest in making sure that doesn't happen, whereas the poor would love to see a revolution (I'm sure some poor Iraqis made out quite well from all the looting).

:: Barry 7:07 PM [+] ::
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Discussion: Progressive Taxes

Your discussion brings me back to an oft posted description of "how taxes work", which you can find here at snopes:

How Taxes Work

Once you've read that, here is a response I wrote to it a few months ago:

I think you left off the part of the story that describes why they pay the amounts they do at the restaurant.

It just so happens that these 10 men also work at the same business and live on the same street. And that (for the sake of simplicity) the $100/day for dinner is equal to 1/10 their total pay (ie as a group they get $14g in their bi-weekly paychecks). Now it so happens (according to 1998 US Census data) that the 4 guys who work menial jobs (janitorial, maintenance, delivery, etc) for the company have to split $70 between them for their paycheck. Meanwhile the 5th, who holds an administrative/secretarial position gets $238 every two weeks. The 6th who is a junior engineer has a paycheck of $392. The senior engineer, man #7 gets about $560. The 8th man is a middle-manager who has a pay check of $980. The 9th man, VP of the company is paid $1820. And the 10th, the CEO? He takes $9940 home every two weeks.

Now when they show up at the restaurant, they know that the four menial laborers have already spent their paycheck just to try to cover their rent. So now even if they want to make those 4 pay, they simply can't do it and the lot of them would get tossed out of the restaurant. So they can either make them starve, or everybody else can chip in. Being that they're neighbors and co-workers and the others would prefer they not starve (not to mention worrying about them starting labor unions or rioting or resorting to criminal activities or anything like that) so they decide that they will after all pitch in.

Now, the secretary is having some difficulty making ends meet too, while he is better off than the laborers it is very difficult for him to provide for his family, and the group figures that it wouldn't be fair to charge him the same amount as those who are better off, and that if they did it might cause him to go bankrupt which would then cause harm to their bank and community (did I mention they all bank together too?). So they come up with a scheme where each pays in according to their income.

But the CEO, sly fellow he is, slips a few bucks to the waitress and gets her to fudge the individualized bills in his favor. So in the end we have the 4 laborers who are paid only 00.5% of the company's income get a free ride by not having to pay anything for dinner. Meanwhile the secretary who earns 1.7% of the money gets a bit of a boost by only having to pay 1% of the bill. And the wily CEO who earns 71% of the money only has to pay 59%. While all of these folks are getting a good deal, who is it that gets screwed? Our 4 middle class workers. The junior engineer who earns 2.8% of the money but pays 3%, the sr engineer who makes 4% but pays 7%, the mid-manager who earns 7% but foots 13% of the bill, and even the VP who makes 13% yet has to pay 18%.

When the restaurant offers a discount and calls attention to the pay structure everyone notices the discrepancy, that the CEO isn't paying his fair share. "Hey!" they say, we can use this opportunity to get that back in line by giving this discount to our middle class workers. But unfortunately for them, the CEO has the restaurant owner in his back pocket and so the restaurant owner sees to it that most of that discount goes to the CEO.

And that boys, and girls is WHY the systems works the way it does.

Oh, there was a bit of an inaccuracy regarding the end of the scenario as well. Generally when the 4 guys who combine for 1/2 of 1% of the wealth decide they've had it with the 1 who controls 70% of the wealth, they don't beat him up and keep him from dinner, they guillotine the fucker and divide up his money. Which would make it all that much easier to pay the next day's bill (and all the more incentive for the CEO character to not cheat out of the system).

:: Joe 9:55 PM [+] ::
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Discussion: Progressive Taxes

Joe, I think your numbers are suspect. Here you can find the most recent Census data on income, with a summary briefing here . Best I can tell, the chart detailing the "Share of Aggregate Income Received by Each Fifth and Top Five Percent of Households," at A-2 would capture the data needed to get your numbers. The lowest fifth (or two of ten) received 3.5% of the total income, the top fifth got 50.1%, and the top five percent received 22.4% of the total income. Two of the ten in our scenario, then, would each receive $245 in their paycheck (3.5% of $14,000, split two ways), the top two would take in $3507 each (50.1% of $14,000, split two ways)--the CEO, if he is in the top one of twenty, would at most take in $6272 (22.4% of $14,000, multiplied by two). I don't trust my own numbers, either, but I think MoJoJoJo's trying to pull something shady.

All the same, I think it's a fair argument that the progressive tax system may discourage the right people and encourage the wrong ones (I concede that there is probably a ceiling to the incentive argument. Does a billionaire really think about marginal value on that next buck he might make?). But I also think it's fair to urge that those with the most too lose by a regime change should pay the most to see that it doesn't happen.

:: Barry 2:19 PM [+] ::
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Discussion: Progressive Taxes

I've spent about a half-hour trying to track down the document I based that on, without much luck. I will vouch that it was an authentic doc downloaded from the census.gov site. Looking at what I can find, however, I'm starting to think I was looking at the wealth numbers rather than income.

Update: I still haven't found the exact doc that I remember working from. But I have determined which numbers are being referenced. It is the a measure of wealth, and not the census either. It was the Federal Reserve Survey of Consumer Finance. You can find some relevant analysis here and here. Both cite numbers stating approx 1/3 of all wealth in the US is held by the wealthiest 1%, more than 1/3 is held by the next 9%, and the remaining ~1/3 is held by the remaining 90% of the people. It looks pretty much like the numbers I was using. How much that changes my conclusions, I'm not entirely certain, probably not much. But it does make the story that goes along with it a bit incongruous.

:: Joe 3:16 PM [+] ::
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Discussion: Wealth Tax v. Income Tax v. Consumption Tax v. ???

FYI, Pete, Dave, and Ryan haven't responded to their invites yet (update: Pete just signed in too). Worthless slackers. Henry has signed himself up, so maybe we'll hear from him.

I can't say as I've ever spent much time considering tax systems. After spending a little while thinking about it, I have to prefer a wealth tax most and consumption tax the least. I very much agree with Dave's assessment of progressive tax systems, and would go a couple steps farther.

In addition to the fact that wealthy people most benefit from stable society, they are, quite frankly, most able to pay. As a society we tend to value people having access to things that we regard as necessities; food, water, shelter, clothing, medical care, education. For people with little wealth, these things can require their entire income to cover. At the least they use up a substantial portion of it, leaving little for discretionary spending. For a wealthy person these necessities require a much less significant proportion of their wealth to provide for. A much higher proportion of their wealth is available for discretionary spending. Since part of the job of the government (at least in my twisted mind) is to ensure that all people have the necessities, it seems counter-productive to take money from people for whom that money is vital to their ability to provide themselves with necessities. Rather, take a greater proportion from those who have the ability to pay it out their discretionary spending.

Further, (and I'm sure this will get me into a great deal of trouble) I think there is a role for the government to regulate and redistribute wealth. It is unhealthy for any society to have too uneven a distribution of wealth. When wealth becomes too concentrated in too few places the social structure becomes inherently unstable. Additionally the presence of a strong middle class is vital to the healthy function of a democracy. Democracy can be corrupted all too easily by money, and as such allowing people to amass vast wealth subverts the democratic process and allows those people to exert a much greater influence over the political system than anyone else.

So, for these three reasons (fairness (as per the discussion with Dave), practicality, and wealth regulation), I favor taxation on wealth. On the other hand the practicality element of it is largely cancelled out by the practical issues of administering the tax. It is much easier to impose taxes on transactions (income/consumption) rather than wealth, as they are discrete and easily quantifiable. Income tax offers some compromise in that income is relatively easy to track across a period of time and the tax can still be implemented in a progressive manner. Clearly there is a correlation between income and wealth. So using a progressive income tax system is a simpler, but less accurate, method of trying to tax wealth. A consumption tax would be quite difficult to implement in a progressive manner, and as such I don't care much for it.

:: Joe 12:59 PM [+] ::
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Discussion: Arrival and taxation

Damn... I just found out that Mozilla doesn't take well to Blogger, so I lost my text. I'll try to recap briefly.

First of all, my apologies for the late arrival! Thanks to Barry for the reminder to log my ass in. Joe, I think the Diamond article sounds quite interesting. I'll plan to give it a read before the Boyz Weekend.

Regarding taxation, why not simply use a flat percentage tax? This naturally takes a bigger bite out of the wealthy (amount wise) and seems likely to be perceived as fair by everyone. Furthermore, it is (in theory) much easier to implement and presumably lest costly to implement by the government. My concern with more complicated tax schemes is that they get bogged down in bureaucracy, especially when some jackass legislator slips in a few extra rules for his homies. Honestly, would there be this tremendous need for accountants, lawyers, tax software, etc, with a flat tax? I realize there are still issues in determining what is income, but this seems minor in comparison. I am no tax expert, so feel free to enlighten me on this.

Next, I am in favor of a consumption tax in certain circumstances. In particular, I think they need to be used in health care. Consumption taxes, eg. tobacco, can be very effective in reducing the use of harmful substances. As such, it can be an excellent preventive health measure. Furthermore, the income generated from such income can be used in the health care necessary due to the use of such substances. Unfortunately, such taxes are not directly tied to health care funding at the moment.

Peace out

:: Ryan 10:38 PM [+] ::
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Discussion: Arrival and taxation

I use mozilla (phoenix) almost exclusively and haven't had any problems with this site. BTW, you need to publish your posts as well. When you hit post it saves your text, but it doesn't put it on the web page. It will only show up on the page after you use the publish button..

I think there are a few issues with flat taxes. First and foremost is that they aren't progressive, as per the earlier discussion. In fact, with regards to wealth levels, a flat tax would be regressive. Going back to previous posts, if wealth is really what we're after, income is just an indicator of wealth. Income distributions, while very uneven, are not nearly as extreme as wealth distributions. Looking at our numbers, while the top 5% earned 22% of all income, the top 5% owned somewhere around 50% of all wealth. If income is important as an indicator of wealth, rather than being the focus in and of itself, then a "fair" tax would have to be flat across wealth levels rather than income levels. By this measure a flat income tax is regressive, with wealthier people paying a lower percentage relative to wealth than poorer people.

Second, the gains are, I think, not as great as is generally perceived. Much of what you do when you're filling out your taxes is documenting and calculating income. This wouldn't change. Income can come in many forms and from many sources. There is a limit to how simple the tax codes can be regarding specifying income. Software would likely still be used to prepare this data and consultants still employed to massage it. Additionally these things will probably continue to become more automated, efficient, and user-friendly as times goes on (for both the taxpayer and the IRS). Software tax tools are already pretty good..

Third, is that it takes a major tool away from the government. You mention yourself the value of taxing certain behaviors. These incentives are used for various purposes (educational credits, promoting home ownership, promoting charitable donations, promoting long term investing, etc). There was some talk during the last Presidential campaign of providing substantial tax credits for hybrid cars. These things are succeptible to backdoor legislation, but no more so than any other laws. That's more of a general problem with the legislative system.. If this ability to tinker with the tax system were lost these incentives would also be lost, or else would have to be legislated separately. And as far as bureaucratic overhead goes, I think we're better off wrapping them all into the tax system than to have a separate data collection and payment systems for each thing that congress wants to create incentives for.

:: Joe 10:35 AM [+] ::
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Discussion: Taxation of Wealth and other ramblings

Joe, thanks for the clarifications on the flat tax. It still seems to me that it could be a very fair and simple method of taxation - the debate here seems to be about whether we tax all wealth in addition to (or excluding) income. This seems like a very challenging issue - exactly what wealth do we tax and how do we value it? Who decides the value? If I own land, should the number of trees, water resources, minerals, etc., be accounted for in determining its value? Some, but not all of these factors, may be accounted for in the present market value.

On another note, I am wary about letting the federal government have such access to wealth taxation. They seem to have proven themselves fairly incompetent at managing taxpayer funds. I would be reticent to give them any more. If there were an extensive wealth tax (whether flat, progressive, or whatever) I think that the state, county, or municipality should take precedence. All we need is another trillion dollars for our B2 bombers and missle defense that isn't worth my own ass. Yup, I know, Jefferson vs. Adams all over again. I don't think this debate will ever end (unless Dubya has the ring, of course). By the way, speaking of State vs. Federal rights, I thought you might find the commentary below on Mr. Ashcroft interesting. It's from the latest issue of The Economist.

FYI, I am also in favor of a forfeiture of wealth upon death, although I see no reason for the threshold to be so high. Any reason for $50 million, Barry? Who needs that much money? Another cool idea would be to allow the soon-to-be-dead dude to alot money over the threshold to soon-to-be-dead dude's favorite charities. Is there any such provision in current tax law? At any rate, I propose something like $1 million as the threshold for forfeiture.

In other news, I thought you might be interested in reactions to the Oxfam Fair Trade Report that have been published and are linked on the Oxfam web site. I haven't looked at them yet, but it appears that there are arguments for and against the Oxfam story.
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United States: Steamroller Ashcroft; Lexington
The Economist; London; May 3, 2003;

Volume: 367
Issue: 8322
Start Page: 56
ISSN: 00130613
Full Text:
(Copyright 2003 The Economist Newspaper Ltd. All rights reserved.)

Conservatives beware: an out-of-control attorney-general is trampling on your principles

SO FAR, the debate about John Ashcroft has focused mainly on the war against terrorism. Libertarians moan that the hyperactive attorney-general has hugely expanded the government's power to monitor citizens (by wiretapping their telephones and so on); that he has made it much easier to detain and deport immigrants and foreign visitors, particularly Arabs; and that he has ruthlessly accumulated power over the country's sprawling judicial system in his own hands. Conservatives wearily retort that wars force everybody to rethink the balance between freedom and security. Surely the attorney-general is duty-bound to err on the side of vigilance to thwart another September 11th?

Well, yes. But what if you examine Mr Ashcroft's record in other areas, such as medical marijuana, assisted suicide and the death penalty? You find precisely the same pattern of John-knows-best centralisation. The country's terror-fighter has also become the country's self-appointed moraliser-in-chief. And he is trampling all over two conservative principles he used to espouse: limited government and localism.

Begin with an idea precious to most Republicans: states' rights. Mr Ashcroft has prosecuted "medical marijuana" users in California despite a state initiative legalising the practice. He has tried numerous ploys to challenge Oregon's assisted-suicide law (including encouraging the Drug Enforcement Administration to revoke the licences of participating doctors), thus snubbing both the state, which has passed the law not once but twice, and the Supreme Court, which has explicitly left policymaking in this area to the states. He has repeatedly tried to bully local federal prosecutors into seeking the death penalty, despite a long tradition of local discretion in death-penalty cases.

Mr Ashcroft's new reverence for central government is beginning to seem downright Democratic, if not Gallic. The whole point of the American political system is its sensitivity to local differences. Federalism, as Justice Louis Brandeis put it, means "that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country." It also means that a huge country with a richly diverse population can try lots of different approaches to moral issues. People in rural Nebraska can adopt a different approach to lap-dancing from people in San Francisco; Vermont can demonstrate its uniqueness by favouring both gay marriage and tight controls on internet porn.

"Moral federalism" has deep roots in America. The English Parliament's Act of Toleration (1689) left religious issues almost entirely to local discretion. People with different religious views congregated in different regions--Puritans in Boston, Catholics in Maryland and so on. The Founding Fathers laboured mightily to keep the federal government out of dictating civic virtue. James Madison noted (in Federalist Paper 56) that different groups progress at different speeds. Alexander Hamilton (in Federalist 17) argued that any attempt to impose a centralised morality would be "as troublesome as it would be nugatory". The local administration of justice is "the most powerful, most universal and most attractive source of popular obedience and attachment".

This tradition of moral federalism would seem particularly practical now. The country is still basically split down the middle politically, and this political divide reflects a deeper division about values. When it comes to matters such as God and sex, many of the people who voted for George Bush live in a different moral universe from Al Gore's supporters.

There are clearly some areas where the federal government has to step in to protect individual rights. It was right to use its might to dismantle segregation in the South. Mr Ashcroft has legal grounds to argue that the constitution guarantees individual citizens the right to bear arms. But in general the Justice Department needs to err on the side of caution on issues where reasonable people can disagree. It should recognise that different communities have very different views: large cities, for instance, voted for Mr Gore by a 71% to 26% margin, while small towns and rural areas voted for Mr Bush by 59% to 38%. And it should try, as far as possible, to allow those communities to make decisions for themselves, rather than forcing them to bow the knee to Washington. Agreeing to disagree offers the country the best chance of avoiding an endless culture war in which both sides use the federal government to enforce their views.

Nobody should be more worried about Mr Ashcroft than conservatives. Hasn't it usually been the Democratic Party that has championed big government and Washington-knows-best morality? And hasn't it usually been the Republican Party that has stood for local variety? In the 1990s the Republicans owed many of their biggest successes--from welfare reform to school vouchers--to their enthusiasm for federalism. Mr Bush owes his job partly to the quintessentially federalist Electoral College.

A mistake by any measure

Mr Ashcroft's conversion into a centraliser is both hypocritical and short-sighted. It is hypocritical because Mr Ashcroft was once a leading critic of big government. As attorney-general and then senator for Missouri, he resisted a federal injunction to desegregate St Louis's schools so vigorously that the Southern Partisan, a neo-Confederate magazine, singled him out for praise.

It is short-sighted because, as an evangelical who refrains from smoking, drinking, dancing and looking at nude statues, Mr Ashcroft represents a minority in his own party, let alone the country. He has no chance of winning the culture wars: the forces arrayed against him, from the media to the universities, are too vast. The best he can hope for is a live-and-let-live attitude that gives minority views like his own room to flourish. Mr Ashcroft will come to rue his Faustian bargain with the federal government the next time a Democrat sits in his office.

:: Ryan 10:58 PM [+] ::
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Discussion: Taxation of Wealth

Hello all.

I was just reading some of the posts (and talking about it with Barry) and wanted to throw a few cents in on the tax issue. First, I am in favor of a progressive wealth tax. This is for two reasons. The people with the most wealth can most afford to pay and these same people are the ones who benefit most from the main function of government which is to prevent people (whether from within the nation or without) from beating other people up and taking their stuff. Whoever has the most stuff needs the protection the most.

It seems silly to me that somebody like me who makes a great salary but has $150,000 in loans and 0 in the bank pays the same tax as someone who sits on their ass with a fat bank account on which they earn $125,000 in interest. Nor do I think that it is practical to attempt to limit inheritances. There are always accountants who can figure how to transfer excess wealth to the people the transferor wants to, through gifts, joint ownership, corporate formation or some other tool. I understand that a wealth tax would potentially discourage saving, but there is a difference between saving enough to live on in old age and hoarding a massive fortune. Through the progressive nature, it shouldn't be too hard to lay off the former while reaching the latter. After all, assuming the total revenue collected remains the same, the people in my position would have to foot less of the bill and could save more. Besides, consumption is a good thing in that it keeps the economy running strong. Economic problems result when large chunks of the nation's wealth is socked away where neither the public nor the private sector can reach it. Besides, with the revenue collected, it shouldn't be too hard for the government to provide enough for a basic existence to the needy among retirees; the choice would then be whether to save enough to have more than a basic existence in retirement or consume and take what is offered. Either way is fine. Second, it is wealth that the police force, the fire fighters, and the army are protecting--not income or consumed goods. Therefore, it seems only fair that those with the most wealth pay more for these services.

:: David 6:27 PM [+] ::
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Discussion: Wealth Tax v. Income Tax v. Consumption Tax v. ???

I apologize for my prolonged absence. I was reviewing some old posts, and thought I would share a comment, however belated it may be.

In Joe's Post of April 17, 2003, , Joe advocated for a wealth tax system. He highlighted fairness, practicality, and wealth regulation as three arguments that favored his position. Discussing wealth regulation, Joe posited that wealth disparity is correlated with and leads to political instability:

Further, (and I'm sure this will get me into a great deal of trouble) I think there is a role for the government to regulate and redistribute wealth. It is unhealthy for any society to have too uneven a distribution of wealth. When wealth becomes too concentrated in too few places the social structure becomes inherently unstable. Additionally the presence of a strong middle class is vital to the healthy function of a democracy. Democracy can be corrupted all too easily by money, and as such allowing people to amass vast wealth subverts the democratic process and allows those people to exert a much greater influence over the political system than anyone else.

I share Joe's sentiment, but there is an article in the May/June issue of Foreign Policy discussing the causes for Civil War (entitled The Market for Civil War) that gave me some pause. In it, Paul Collier dismisses income inequality as a catalyst for internal strife:

For example, income inequality and ethnic-religious diversity are frequently cited as causes for conflict. Yet surprisingly, inequality--either of household incomes or of land ownership--does not appear to increase systematically the risk of civil war. Brazil got away with its high inequality; Columbia didn't.

Collier goes on to argue that economic conditions generally "remain paramount in explaining civil wars." That is, it is not the distribution of income, but average quality that matters most (the author argues "the risk reaches nearly 80 percent"). Natural resources also play a large role, according to Collier's analysis.

The story also notes that, much "to the dismay of demoncratization activists, democracy fails to reduce the risk of civil war, at least in low-income countries." Too late for that chunk of information. Afghanistan, Iraq: sorry. No harm, no foul?

:: Barry 10:53 PM [+] ::
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Article: US Plans to Send 20,000 More Troops to Iraq; and at the same time, Congress Hacks Taxes with a Machete

Wake Up CNN, NYTimes, and the Rest of the Slacker American Media!

We find ourselves in a pitiful state of domestic affairs when we who search for truth must find it in the foreign media. Especially on Memorial Day weekend, when you would expect that troops going out to defend the pax americana might make for a good news story. Even the Pentagon's own website, where you might expect some patriotic back-slapping bon voyage to the 20,000 troops and their families. What a disgrace. George, you have anything to say about sending 20,000 more troops to clean up your mess during today's radio address?

Why, of course. not. G.W. is too busy touting his tax-cut and spend policy. Someone needs to tell him that the federal budget deficit is not just monopoly money, and learn to trust his advisors, like Alan Greenspan, who sees little to gain from the cuts, according to this article in the Washington Times. The tax cuts are well summarized in this Christian Science Monitor article. Bush seems to be putting all of his stock in Treasury Secretary John Snow, who praised the tax cuts (his comments may be found here).

:: Barry 2:36 PM [+] ::
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Article: Didn't Get the Memo

Treasury secretary Paul O'Neill was run out of town last December for having independent opinions in an administration where being "on message" is the single greatest criteria for holding office. A study he intiated continued in his absence and is now coming back to haunt the administration even as they try to bury it. The report found that we're on track to more than $44 trillion in budget deficits. Let it not be said that we don't set our goals high.

:: Joe 4:31 PM [+] ::
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::A Tangled Web::

Asia Times has a very interesting story discussing the Bush administration's moves attempting to get China to revalue the yuan. They are critical of this policy for number of reasons. (FYI, it looks like China is rejecting this pressure in any case...)

First is that we have been running a huge trade deficit with China for some time (which is, of course, the administration's reasoning for this move). During this time China has been piling up US currency, but they have little motivation to buy anything from the US (or anyone else) with it. What can they get from the US that they can't produce cheaper themselves? So in an effort to do something productive with this money they've mostly been buying US government securities (ie financing the US federal budget deficit). If the US reduces this trade deficit at the same time that our budget deficit soars to record levels it will become difficult to find takers for securities to finance our debt. This will result in the US raising interest rates in order to make the securities more attractive, countering Alan Greenspan's intensive efforts to stimulate the US economy with low interest.

They also mention that a majority of the products imported from China are actually produced by American companies (something highlighted in the Oxfam report as well). To some extent this makes the trade deficit illusory (or at least makes it appear much worse than it is). Forcing these companies out of China will make their products more expensive and less attractive on the world market and could end up hurting American business.

Additionally it will have the effect of making products more expensive to Americans (whether the products continue to come from China, or are manufactured elsewhere, including the US), stifling US consumer spending or driving up consumer debt, which is already at dangerous levels.

Finally, the article does not discuss this, but I wonder how much of that manufacturing would return to the US even if China becomes less attractive? Wouldn't Indonesia, the Philippines, and India still be more attractive places to move these manufacturing centers to? I think there would have to be a more intensive effort to devalue the dollar to actually bring manufacturing back home. There is also a CSM article today discussing this general topic.

In all it becomes a very difficult situation to project. However, one thing is clear in all this: our massive budget deficit and national debt clearly constrain our ability to control our own economy with regards to international trade. These are penalties beyond simply mortgaging our future prosperity and indebting future generations. The debt locks our monetary and fiscal policies together, forcing us to make a choice between them. We can keep interest rates low to try and spark growth, but it means maintaining a strong dollar which hurts trade. Or we can devalue the dollar to reduce our trade deficit, but it will cost us higher interest rates to finance our debt. We can't have both.

:: Joe 1:06 PM [+] ::
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::The Dollar Drama::

Also on CSM today, the latest installment of the ever-gripping dollar drama. In today's episode a number of experts propose that now may be an "optimal time to achieve the inevitable dollar correction". If so, hopefully he means sometime before next fall. :)

:: Joe 4:09 PM [+] ::
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::An End to Progressive Taxes::

CSM is running an insightful story on how Bush's tax cuts are moving US policy towards a flat tax. I knew that the cuts were top-heavy, but I hadn't realized how far they went. If the Democratic candidates can't figure out how to make this play with the electorate they deserve what comes to them. They normally get scrared off by accusations of "class warfare". At some point they have to realize that, yes, it is class warfare, and they, along with 90% of the US population, are getting their asses kicked.

:: Joe 1:11 PM [+] ::
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::A Banking Intro::

Henry has been delving deeply into the world of global banking systems. He has many interesting theories on the subject, which I'm sure he'll enlighten us with once he's through with finals. He has concerns regarding fiat currencies, particularly with the overextension of the US's fiat currency, and seems to be mostly in agreement with the "Austrian school" of economics as established by Ludwig Von Mises. He assures me that although mises.org has been hijacked by intellectually inbred libertarian lunatics, there is much merit in Mises's economic theory. So in order to better equip myself for these discussions I've dug through the Asia Times archive to find a large, multi-part banking system primer written by Henry C K Liu (if he ever wrote any sections beyond 4c, I haven't been able to find them). If anyone else wants to get a head start on this topic, there ya go...

:: Joe 12:10 PM [+] ::
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::Going for the Gold::

Henry's not the only one worrying about the state of the dollar. Even Clinton labor secretary Bob Reich is concerned about the possibility of a run on the dollar. I still suspect that the Euro may not be the best place to hide from dollar instability. If the dollar collapses, the Euro may well come with it..

:: Joe 3:53 PM [+] ::
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::Is This Progress?::

The release of this year's trade figures exposes the dark, seamy underbelly of the recovery. We've set a new record trade deficit to go along with our record federal budget deficit. Personal debt levels are also setting records. And based on our previous conversations I think we are generally in agreement that the dollar is substantially overvalued, generally speaking. To top it off, our good friends at the Heritage Foundation point out that the federal government has generated these record deficits despite a $247 billion/year windfall of reduced interest payments on the national debt due to low interest rates. Now, I'm still not sure how much of the mises.org fiat currency doom and gloom to buy, but it is absolutely clear to me that these trends are unsustainable. Given the general tendencies of economic systems (read massive feedback loops), I suspect when they reach the limits of their sustainability they will not sort themselves out gently. Particularly given the dire circumstances of the impending baby boomer retirements. Even if the political establishment starts to recognize this problem, public inertia and the rapid onset of fiscal catastrophe will likely prevent them from having the necessary impact. It is becoming difficult for me to see a scenario where we do not suffer a major economic meltdown sometime in the next 15-20 years. Maybe buying gold is not such a bad idea...

:: Joe 11:55 PM [+] ::
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::Going Down?::

The dollar continues to sink..

:: Joe 12:13 PM [+] ::
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::Put It On the Tab::

We are just setting records all the time. All time highest budget deficit, highest government debt level, highest trade deficit, lowest valuation of the dollar vs Euro... And now the US has for the first time ever surpassed $2 trillion in consumer debt. Yay for us! Consumer debt levels have doubled since late 1994. In light of all these numbers, how people can think we are in the beginning of a real economic recovery is beyond me. It may be that we are starting to see the split occur between the US economy and the stock market which covers an increasingly internationalized portfolio. I think we've discussed this before, and it is also mentioned in the Brookings discussion. As multinationals become more internationally based, it allows the stock market to perform well even as the US economy goes in the toilet.

:: Joe 1:58 PM [+] ::
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::Oh, That Dirty Old Dollar::

Here's a little more economic pessimism from me (surely you haven't had enough yet). Thanks to my mom for pointing this one out. A couple of financial writers have a new book out predicting a dollar collapse. They seem to have borrowed a lot of theory from the Austrian school. It's more or less what Henry said, and the ideas are starting to bubble up in more and more unexpected places.

:: Joe 12:38 AM [+] ::
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::Alan Greenspan, Evil Mastermind?::

Here's a bit of a guest column, Hank's response to the email with the review of Financial Reckoning Day, posted yesterday:

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Just thought I'd give an update on my economy watching (and throw in an opinion about Alan Greenspan).

My crackpot theory about Alan Greenspan is that he is doing all of this quite deliberately. I think that he realized twenty years ago that the American financial situation was already intractable. He wanted to put the world back onto a sound financial footing, but realized that this could not be done without ruining the American economy. He realized, in a very Machiavelian turn of mind, that the extreme exploitation of the existing system, which he thoroughly despised, could simultaneously make America tremendously wealthy and precipitate a financial collapse that would stand in perpetuity as a warning against the excesses of fiat money. Thus Greenspan's primary virtue would be his ability to dramatize. He has convinced the American people that the final boom of the twentieth century was real; and he has convinced the IMF and the world's central banks that he is working to protect their interests, while quite obviously working to the contrary.

Thus we get to the point that we are at today. The world's central bankers have finally begun to put the question to the U.S.: "What the hell do you think you're doing?" On the surface they seem stern, but deep down they're terrified that they might already know the answer. The European Central Bank has finally expressed concern about the declining dollar. This expression of concern indicates a likelihood that the ECB will take action against the plumeting dollar, such as lowering European interest rates (already at the lowest rate since immediately after WWII: 2%). Of course this lowering of interest rates would not stop the dollar's actual fall, but merely pressure the Euro to fall with it.

While the ECB and the BoJ (which, having already established zero interest rates, must exchange Yen for Dollars in massive quantities [the cap on borrowing for this purpose has been increased dramatically for the coming year] in order to pull off their own intervention) scream for the U.S. to normalize its finances, and former treasury secretaries Paul O'Neil and Robert Rubin openly criticize our current economic policies, Greenspan and the current administration continue to laugh off their concern. Their levity is understandable. The White House can laugh because they're insulated enough to ignore the criticism, ignorant enough to fail to understand it if they listened, savvy enough to realize that responding to the criticism would be politically untenable even if they understood it, and wealthy enough to not suffer even if the criticism proves correct. Greenspan can laugh because he knows that Europe, Japan, and China are foolish enough to give us everything they own (via the mechanism of their "export driven economies") in a vain attempt to prevent the U.S. from defaulting on the debt (via inflation, a mechanism that prevents them from ever laying claim to the goods we bought from them with their own money, for technically we will pay the debts, with extremely debased money) which constitutes the entirety of their savings. The inconcievable response of these foreign powers to our debonair fiscal policy is to accelerate their lending.

Hence we see the wisdom of Greenspan's approach. Terminating this cycle would be a painfull and shocking process, nothing is more onerous to the politician. As the status quo makes americans more wealthy there is no reason for our politicians to bear the terrible burden of ending it. Instead we will simply exploit our position to the fullest until the time that foreign pols are able to overcome their shortsighted constituents and bring about the correction that would put them back on an even footing with the U.S. The only potential downside to this strategy is that after the system collapses America's credit with the world will be ruined; but by then there will be nothing left for us to borrow anyway, as they will have already given it all to us. The only alternative is to pay the debt off legitimately; this policy would be ruinous.

Anyway, the recent show of concern by the ECB with regard to the dollar's decline has brought that decline to a halt. The anticipation of European action has induced hesitation as to the Euro's future prospects. Currency speculators who had invested their money in gold as a hedge against the declining dollar have pulled out en mass bringing about a 15$ decline in the last two days. Of course this statement by the ECB changes U.S. economic prospects not at all. The dollar's decline against the Euro may slow but this does not mean that the dollar is strengthening, it simply indicates that the only major currency that had remained aloof from the devaluation has decided to participate. After all, the dollar isn't falling because the European interest rate is too high, but rather because the U.S. interest rate is to low. The result of any change in ECB monetary policy will merely be competitive currency devaluations, an environment that would enhance the value of holding
gold. Thus I would say that this current decline in gold should be a good buying opportunity (which should prove serendipitous for mom).

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My mom mentioned in the email regarding the article, that she may start to take some action on Henry's gold buying advice..

:: Joe 11:11 AM [+] ::
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::Oil For Gold::

So Dean got whomped in Iowa. More comments on that once the fallout has fallen a bit...

In other news, the rest of the world is getting wise to the plan Henry posted of intentionally pushing the trade deficit so that other countries are holding all the dollars (and dollar debt-load) and we hold all the goods, leaving them in position of needing to prop up our dollars in order to make their holdings worth anything. Former Malaysian Prime Minister Mahathir Mohamad is warning OPEC nations to avoid this scenario by only trading oil in exchange for gold. If his advice were followed, I believe the impact would quite serious.

:: Joe 8:50 PM [+] ::
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