Archive for the ‘Economy & Finance’ Category

Feeling Guilty About Tax Cuts? Then Please Pay More!

John Legend, a famous singer I’ve never heard of, recently sang at the White House.  While there, he said that he didn’t want his tax cut. Legend joins other millionaires like Warren Buffett (whose annual letter is due out tomorrow) saying they want to pay more tax.

Well, let’s give Legend and Buffett two options:

  1. Give to a charity you feel addresses weaknesses caused by tax cuts
  2. Give to the government to pay off the national debt

Option 1 is certainly more flexible, and one I am a huge proponent of.  While liberals complain that the poor will go hungry, people won’t go to college, etc. because of tax cuts, these same liberals can contribute their tax savings to organizations that help feed the poor, provide scholarships, and whatnot.

Option 2 allows you to contribute your tax cut savings back to the government.  One can visit and contribute directly to the Bureau of Public Debt.  According to Reuters, as much as $3 million is given to the Bureau annually. Of course, that amount is a drop in the bucket compared to the $14 trillion in issued debt.  Contributions to the Bureau are deductible from your individual taxes, so make sure you gross up how much you really want to give to give you maximum benefit to the government.

So please, Mr. Legend, if you’re feeling guilty, there are plenty of areas more efficient than the government to give your tax cut.  Or, you are welcome to send your check in care of the Landon Estay Needs Money Fund.

Not Just Tax Cuts Alone…

President Obama just signed extensions of tax rates and credits that were due to expire at the end of the year. Without the current rates extended, I believe the economy would once again return to GDP shrinking and additional jobs lost. However, this is only one part of the equation. To really get the economy moving and get the federal budget balanced, serious reforms need to be made.

First, I am a HUGE fan of Rep. Paul Ryan. Back in 2008, he introduced his Roadmap for America’s Future. In it, he proposes a number of reforms that will make Social Security and Medicare more sustainable in the long run, changes to tax structure that helps individuals keep more of their money, and modernizes health care to help those who are higher risk or uninsurable obtain coverage they need. Many economists from varying sides of political thought have analysed it, and even those who disagree with parts of it appreciate Rep. Ryan for putting out an idea instead of just “saying no.”

Next, we have to comb through government expenditures to find inefficiencies, waste, and duplication. And yes, that includes the Departments of Defense and Homeland Security. From FY 2008 to FY 2009 (2009 is still considered estimated), net expenditures increased from $2.98 trillion to $4 trillion. A large portion of this, over $700 billion, is under the header of Commerce and Housing Credit. Any idea what that is? But from FY 2009 (est) to FY 2010 (est), expenditures went down a little over $400 billion. Even with the reduction of expenditures of Commerce and Housing Credit, increased expenditures in other sectors of the government offset those reductions (source: GPO).  Although I didn’t see the level of detail I was hoping for, Congressional budget leaders need to begin looking at areas that can be cut.  And don’t let the “earmark” argument distract you.

The recent $1.2 trillion omnibus budget proposed but died in the Senate included roughly $10 billion in earmarks.  For those of you not good in math, that’s less than 1% of the whole budget.  That’s a mere drop in the bucket compared to the whole budget.

The federal expenditure budget should be constrained to BELOW inflation + GDP growth… and that includes Department of Defense and Homeland Security.  Under full GOP control (we’ll include FY 2001 – 2006), average increase in expenditures was 7% (excluding Social Security and Medicare).  Under Democrat control of Congress (FY 2007 – 2010 (est)), the average increase was 10% (excluding Social Security and Medicare).  And while they’re at it, Congress must look at selling assets that are really money pits, such as empty office space (unless it’s practical to rent it out).

And finally, we must create an economic atmosphere of stabilization and competition.  Regulations and taxes are two of many factors that either keep businesses from expanding or move operations offshore.  I’m not advocating complete revocation of federal regulations and taxation, but this country needs is sensible rules that encourage expansion and investment while protecting consumers and punishing those that break the law.  Do you think someone like Goldman Sachs really cares if they make $100 billion through unethical means but turn around and settle with the SEC for $100 million (without admitting or denying fault)?  NO! The SEC needs to put the gauntlet down and really punish those that break the law (a la death penalty).

Sorry, I Don’t Like The Gold Standard (but I’m not pro-printing)

After a discussion on Facebook as to why I am not a proponent of the gold standard, I thought it was necessary to explain how I feel here.
What is gold? Gold is a metal, a commodity, a material used in various things. It’s been sought after by man since their creation. Many advocate using gold as a means of backing a currency. Their thought is that, among other things, if there is something backing the currency, the currency holds value relative to other world currencies.
Before currency was extensively used, economies worked on a barter system. If Tom has apples, he can trade them with Harry for oranges. In today’s society, we can equate this to Richard fixing a fence in exchange for me to mow the lawn. This system could not stay efficient in that what one person’s needs and/or outputs are not always the same from day to day. Tom doesn’t always need oranges, and I can’t always mow lawns. (“They let any Tom, Dick, and Harry be President… no offense Jefferson, Nixon, and Truman”)
Currency is a means of exchange that replaced the barter system. Tom may have apples to give away, and Harry may only have oranges to give in exchange, but Tom doesn’t need oranges. Instead, the two assign a value to the goods. They use some sort of base to assign value, whether they call it dollars, yen, or euros. Or, maybe they assigned a number of apples and oranges to fractional ounces of gold.
However, using fractional ounces of gold is quite inefficient. First, the value of gold is currently set around $1400/oz, so one needs 1/1400th of an ounce for $1. It’s impractical to carry around gold wherever you go. It would need to be weighed, and purity isn’t easily assessable. The amount of time needed to weigh and purity test makes the use of gold an inefficient use as a currency. (HEY! You gave me 1/1500 of an oz instead of 1/1400 of an oz!)
Next, gold standard proponents fix the amount of paper currency to the amount of gold on hand. We will assume $1 million of gold (1000 ounces at $1000 an ounce) is on hand at the Bank of Estay for simplicity purposes. Generally, gold standards fix the amount of money associated with an ounce of gold, so we will assume $1000 per ounce. We will also assume for this example that gold and money are readily interchangeable at the Bank of Estay. On the world market, if the value of gold goes down on the world market, citizens of Estayland can purchase gold (100 oz) then subsequently sell the gold to the Bank of Estay in exchange for dollars ($100,000). This would increase the amount of money in Estayland is increased and causes inflation of 10% ($1 million to $1.1 million).

Date Oz Gold in Bank Money in System
1 1,000 $1,000,000
2 1,100 $1,100,000

Same facts as above, except if the value of gold goes up, the citizens of Estayland could exchange their paper money for gold, then sell their gold on the world market. The amount of money in Estayland is reduced. In this scenario, 10% currency deflation would occur in Estayland ($1 million to $0.9 million; we assume that, all else equal, if more money in the system causes inflation, we must also assume less money in the system causes deflation. We also assume that after the transactions, the world value of gold returns to $1000/oz due to supply/demand rebalancing due to changes in supply).

Date Oz Gold in Bank Money in System
1 1,000 $1,000,000
2 900 $900,000

If you look at the Great Depression, countries that were on a gold standard stayed in the Great Depression for much longer than countries that were not. England abandoned the gold standard in 1931, and soon after its economy was on the path of recovery. The US, however, stayed on through 1933, which started recovery in 1934. (China supposedly had a silver standard and felt no effects)
Looking at this chart, it seems to suggest that personal incomes generally rose after a country abandoned the gold standard. Of course, it doesn’t necessarily prove my point since it doesn’t consider any other policies that each country could have put in place to also help personal incomes rise.
My argument is that even without a gold standard, the US$ is backed by not only the good faith and credit of the US government, but also the goods and services produced by Americans. Currency can be anything… paper, gold, diamonds, apples, water, or a lawn mowing. The value of a currency depends on what value others put on that currency medium. If you have a limited amount of paper dollars, then the value of those dollars are high. Same is true with gold, apples, water, etc. If you’re out in the middle of the Gulf of Mexico on a stranded cruise boat, a bottle of potable water has high value. If you’re in jail, a cigarette has a lot of value. If you’re an ice salesman, you’re not going to get a lot of value selling your ice to an Eskimo. And your gold isn’t going to be worth much when you’re in the middle of a desert (or post-Katrina New Orleans) when you’re thirsty and hungry for clean water and edible food.

Let me also make sure you understand that I am not a proponent of free-printing of money. The printing of money is, all else equal, a force that causes inflation. The money supply must be kept in check to ensure that prices of goods and services are orderly. Monetizing debt is not a solution to today’s problems.

Units Currency Currency per Unit
1000 $1100 $1.10
1000 $1000 $1.00
1000 $900 $0.90

As you can see in this table, increasing the amount of currency (or personal income) in the system causes inflation, while decreasing the amount of currency causes deflation. Since units (or we can also call it GDP) stayed the same, an increased supply of dollars made the value of the dollar worth less, requiring more dollars to buy a unit.

Units Currency Currency per Unit
900 $1000 $1.11
1000 $1000 $1.00
1100 $1000 $0.91

Here, the GDP is fluctuating while the supply of currency (income) remains the same. What this table is designed to show is that if GDP falls with the amount of currency staying the same, inflation will occur since not enough units are there to fulfill demand, and deflation will occur if demand (GDP) increases since there’s too many units chasing too few dollars.
So I guess what I’m trying to say is… a dollar, an ounce of gold, or whatever you choose to use as your currency is only worth what you say it’s worth. Currency is merely a medium of exchanging an asset for an asset, and using a paper dollar is most efficient way of effecting trade. A gold standard is nothing more than a shackle that can hinder trade. Yet, the amount of money in the system must be responsibly managed. In essence, we’re probably still screwed either way.