If you have watched Fox News you are probably familiar with their "fair and balanced" panel discussions. They usually have two conservative commentators and two liberal commentators to discuss issues of the day.
One of their more interesting discussions was about cutting taxes versus cutting the deficit.
The commentators who favored tax cuts argued that tax increases would hurt small business owners who are the source of about 85% of the new jobs that are created. Therefore, tax increases would extend the current recession.
The commentators who favored deficit reduction argued that it was inconsistent for fiscal conservatives to support both deficit reduction and tax cuts at the same time. Their obvious assumption was that tax cuts reduce the amount of taxes the government collects and must therefore result in higher deficits.
Neither group discussed the issue of spending in relation to deficits.
But the tax cut advocates did argue that tax cuts increase total economic output and therefore result in higher tax collections. They also pointed out that past tax cuts have reduced the annual deficit and in some cases have helped to generate surpluses.
The liberals who argued in favor of tax increases to reduce the deficit apparently operate on the assumption that the economy is static and that tax policy does not alter economic activity. They seem to be unable to accept the idea that lower taxes results in more jobs and prosperity which in turn result in more tax revenue that can be used to reduce the deficits. Nor did they seem to be concerned about the impact of government spending on the deficits.
Vern
Tuesday, July 27, 2010
Friday, July 23, 2010
Who Suffers from Deflation?
It often seems that the financial media treats deflation as if it were some sort of financial plague.
It's somewhat obvious that everyone is hurt by inflation, right? Oh yeah, I almost forgot. People who owe money to banks or other lenders like inflation because they get to pay off their debts with cheaper money. That must mean that the lenders don't like inflation and logically should like deflation. And debtors should be the ones who get hurt financially during periods of deflation.
But it seems that it's the bankers who scream the loudest about the evils of deflation. Why is that?
Put simply, it's because they have less money to loan at interest rates above what they have to pay for the money.
The banks get money to lend from three main sources. One is from the money that is deposited with them. They can loan up to about 90% of those deposits to borrowers at interest rates above what they have to pay the depositors. The second source of money is from the deposits by the borrowers or from people who have borrowed funds from other banks. But that is probably their most expensive source of funds.
The third source of funds is from the Federal Reserve and it is often the cheapest source of funds. Right now, the Fed is keeping the interest rates they charge member banks as low as possible. In fact, the rate is so cheap that the banks are finding it safer and more profitable to just park that borrowed money in U.S. treasury bonds.
With deflation, it works pretty much in the opposite way.
Fewer people are borrowing money so the banks have less money to lend. The Fed is likely to try to push money into the market with lower interest rates but if people aren't borrowing, it's like pushing on a string.
With deflation, prices are generally declining. Each dollar in circulation has more purchasing power. Although borrowers pay off their debts with more valuable dollars, that's not a profitable thing for them to do. So they try to pay off debts as soon as possible instead of delaying the payments as long as possible. And there is then less money in circulation which reduces the profits for the banks.
The bottom line is that it is the bankers who are hurt the most because of deflation. And the Fed is owned by the bankers. So if I have to place a bet on whether we are more likely to have inflation or deflation, I'll bet on inflation.
But there are some times (like now) when some deflation or at least a lack of inflation is unavoidable. That's because bankruptcies and loan defaults are inherently deflationary. They offset the money that was created when the loans were made and reduce the money in circulation.
But in the long run, those who avoid debt would be better off with deflation.
At least that's the way it seems to me.
Vern
It's somewhat obvious that everyone is hurt by inflation, right? Oh yeah, I almost forgot. People who owe money to banks or other lenders like inflation because they get to pay off their debts with cheaper money. That must mean that the lenders don't like inflation and logically should like deflation. And debtors should be the ones who get hurt financially during periods of deflation.
But it seems that it's the bankers who scream the loudest about the evils of deflation. Why is that?
Put simply, it's because they have less money to loan at interest rates above what they have to pay for the money.
The banks get money to lend from three main sources. One is from the money that is deposited with them. They can loan up to about 90% of those deposits to borrowers at interest rates above what they have to pay the depositors. The second source of money is from the deposits by the borrowers or from people who have borrowed funds from other banks. But that is probably their most expensive source of funds.
The third source of funds is from the Federal Reserve and it is often the cheapest source of funds. Right now, the Fed is keeping the interest rates they charge member banks as low as possible. In fact, the rate is so cheap that the banks are finding it safer and more profitable to just park that borrowed money in U.S. treasury bonds.
With deflation, it works pretty much in the opposite way.
Fewer people are borrowing money so the banks have less money to lend. The Fed is likely to try to push money into the market with lower interest rates but if people aren't borrowing, it's like pushing on a string.
With deflation, prices are generally declining. Each dollar in circulation has more purchasing power. Although borrowers pay off their debts with more valuable dollars, that's not a profitable thing for them to do. So they try to pay off debts as soon as possible instead of delaying the payments as long as possible. And there is then less money in circulation which reduces the profits for the banks.
The bottom line is that it is the bankers who are hurt the most because of deflation. And the Fed is owned by the bankers. So if I have to place a bet on whether we are more likely to have inflation or deflation, I'll bet on inflation.
But there are some times (like now) when some deflation or at least a lack of inflation is unavoidable. That's because bankruptcies and loan defaults are inherently deflationary. They offset the money that was created when the loans were made and reduce the money in circulation.
But in the long run, those who avoid debt would be better off with deflation.
At least that's the way it seems to me.
Vern
Saturday, July 17, 2010
Logic vs. Faith
For a long time I have found it difficult to understand how otherwise intelligent people can honestly believe that any government is able to create prosperity or even security. To a large degree it seems that those who are the most educated (and therefore presumed to be highly intelligent) are the most likely to argue that government is the solution to every problem and the great provider of greater prosperity and justice for all.
I have developed a litmus test with respect to the honesty of politicians based on their promises about what the government can do for their constituents. When a candidate for President claims that he will be able to "fix the economy", I regard him as either a fool or a lier. The government can impose laws and regulations and they can impose taxes or create new money through cooperation with the Federal Reserve. They can create an environment that encourages entrepreneurs but they can't create prosperity. That can only be done by private industry.
More laws and regulations rarely solve more problems than they create. The regulations consume resources to fund the bureaucracy and they restrict or inhibit industry in a variety of ways. They create distortions in the economy and cause industry to divert resources to deal with whatever mandates are imposed. For every useful law or regulation, there are a dozen others that are politically motivated and pander to the goals of various special interest groups. Government benefits for various constituents inevitably lead to an expansion of the intended scope of the program.
The laws and regulations inevitably require more taxes or more "funny money". The progressive income tax provides an incentive for those who are excluded from the tax (the bottom 50% of households) to demand more government benefits at the expense of those who do pay income taxes. It is a simple truth that whatever we tax, we get less of. When we tax income we end up with less income. When we tax assets, the assets always evaporate. When higher taxes become unproductive, the government resorts to the debasement of the currency. In a country with a central bank that simply involves the issuance of government bonds in exchange for newly created money. And that leads to inflation, which diminishes the purchasing power of the currency.
But the advocates of more government and central planning are immune to this kind of logic or common sense. They seem to base their decisions on blind faith that a few people with concentrated power can somehow produce a better result than millions of individuals who are motivated to find solutions for whatever problems they may face. The advocates of bigger government believe that centralized power and planning can force people to do what they would otherwise not do. But force is never a motivator. It does not lead to maximum effort. It only leads to the minimum effort required to avoid punishment.
In a controlled economy, the government pretends to pay the workers and the workers pretend to work. Eventually the entire system begins to fade the way a battery operated appliance does as the battery loses its power. History is full of failed attempts at managing an economy. But the proponents seem to believe that they have the magic missing ingredient to force people to be more productive.
Faith in the flawed concept of economic equality is the cause of untold misery. The advocates of more government operate on faith and blindly ignore the many clear lessons of history and logic.
Just my two cents.
Vern
I have developed a litmus test with respect to the honesty of politicians based on their promises about what the government can do for their constituents. When a candidate for President claims that he will be able to "fix the economy", I regard him as either a fool or a lier. The government can impose laws and regulations and they can impose taxes or create new money through cooperation with the Federal Reserve. They can create an environment that encourages entrepreneurs but they can't create prosperity. That can only be done by private industry.
More laws and regulations rarely solve more problems than they create. The regulations consume resources to fund the bureaucracy and they restrict or inhibit industry in a variety of ways. They create distortions in the economy and cause industry to divert resources to deal with whatever mandates are imposed. For every useful law or regulation, there are a dozen others that are politically motivated and pander to the goals of various special interest groups. Government benefits for various constituents inevitably lead to an expansion of the intended scope of the program.
The laws and regulations inevitably require more taxes or more "funny money". The progressive income tax provides an incentive for those who are excluded from the tax (the bottom 50% of households) to demand more government benefits at the expense of those who do pay income taxes. It is a simple truth that whatever we tax, we get less of. When we tax income we end up with less income. When we tax assets, the assets always evaporate. When higher taxes become unproductive, the government resorts to the debasement of the currency. In a country with a central bank that simply involves the issuance of government bonds in exchange for newly created money. And that leads to inflation, which diminishes the purchasing power of the currency.
But the advocates of more government and central planning are immune to this kind of logic or common sense. They seem to base their decisions on blind faith that a few people with concentrated power can somehow produce a better result than millions of individuals who are motivated to find solutions for whatever problems they may face. The advocates of bigger government believe that centralized power and planning can force people to do what they would otherwise not do. But force is never a motivator. It does not lead to maximum effort. It only leads to the minimum effort required to avoid punishment.
In a controlled economy, the government pretends to pay the workers and the workers pretend to work. Eventually the entire system begins to fade the way a battery operated appliance does as the battery loses its power. History is full of failed attempts at managing an economy. But the proponents seem to believe that they have the magic missing ingredient to force people to be more productive.
Faith in the flawed concept of economic equality is the cause of untold misery. The advocates of more government operate on faith and blindly ignore the many clear lessons of history and logic.
Just my two cents.
Vern
Monday, June 28, 2010
Chemo Now or Surgery Later?
The news today (6/28/10) says that the G-20 rejected the proposal by Obama and some of the G-20 member countries to expand the stimulus program with more borrowed or printed money. Spokespersons in favor of the stimulus plan are arguing that this will result in an extended recession (or worse) and more unemployment.
O.K. Of course it will cause financial pain to stop throwing new money at the problem.
But what's the alternative? More false prosperity for another year or two or even three years? And with each trillion of new money creation or expanded borrowing, the problem gets worse.
Seems to me it's lot like having to decide whether to submit yourself to chemo therapy treatment for cancer now, rather than having to endure severe surgery later on. In a financial context, it's a lot like individuals who have to choose between cutting up their credit cards now or be faced with bankruptcy a few years later.
Most of us prefer to avoid pain as long as possible, but sometimes, the longer we wait, the worse the pain will be. And in some cases, the result is devastating rather than being merely painful.
Just my two cents.
Vern
www.vernonjacobs.com
O.K. Of course it will cause financial pain to stop throwing new money at the problem.
But what's the alternative? More false prosperity for another year or two or even three years? And with each trillion of new money creation or expanded borrowing, the problem gets worse.
Seems to me it's lot like having to decide whether to submit yourself to chemo therapy treatment for cancer now, rather than having to endure severe surgery later on. In a financial context, it's a lot like individuals who have to choose between cutting up their credit cards now or be faced with bankruptcy a few years later.
Most of us prefer to avoid pain as long as possible, but sometimes, the longer we wait, the worse the pain will be. And in some cases, the result is devastating rather than being merely painful.
Just my two cents.
Vern
www.vernonjacobs.com
Tuesday, June 22, 2010
Average Tax Rates and Marginal Rates
When people complain about high tax rates they are usually objecting to marginal tax rates.
When politicians argue that taxes are low they are usually talking about average income tax rates.
A marginal rate is the rate that determines the amount of tax on some increment of taxable income. Most people refer to this as the top tax bracket, but that generally only refers to federal income taxes. The marginal tax rate includes Social Security taxes and state income taxes. People make financial decisions based on the marginal tax rate that will affect the outcome of a particular decision.
A single self employed taxpayer in 2010 with a total income of $75,000 and who uses the standard deduction will be subject to a marginal federal tax rate of 25%. If s/he lives in a high tax state like California, the marginal state income tax rate might be as much as 10%. The tax rate on self employment income is 15.3%, but there is a deduction that is allowed for 50% of that tax, which reduces the federal income tax. That represents a savings of 25% times 15.3% or 3.825%. So the combined marginal tax rate on an additional $100 of self employment income would be about 46.5%.
However, if you compute the actual tax based on the multiple tax brackets for the federal and state taxes, and then add the net self employment tax, the total Federal income tax might be about $11,200. The Self Employment tax would be $11,475 and the state income tax might be $6,000. The total actual tax would be about $28,675. When you divide that by the total income of $75,000, the average tax rate is 38.23%.
For a single taxpayer who makes $50,000 of interest income and has no other income or deductions, his marginal federal income tax rate would be 25% and his state income tax rate in a high tax state might be 7% -- for a total of 32%. (The self employment tax would not apply.) But if you compute the actual tax for this person, the average tax rate would be about 18% instead of 32%.
In addition to distorting the argument with average tax rates, the politicians include the non-paying taxpayers in their calculations. Roughly half of the families in the U.S. do not pay any federal or state income taxes. If the average rate for those who do pay taxes in 20% and only half the families pay income taxes, the politician will tell us that the average income tax per family is only 10%. But the marginal rate for many of the families that do pay taxes and that are also paying the self employment tax may be closer to 50%.
Vern
www.veronjacobs.com
When politicians argue that taxes are low they are usually talking about average income tax rates.
A marginal rate is the rate that determines the amount of tax on some increment of taxable income. Most people refer to this as the top tax bracket, but that generally only refers to federal income taxes. The marginal tax rate includes Social Security taxes and state income taxes. People make financial decisions based on the marginal tax rate that will affect the outcome of a particular decision.
A single self employed taxpayer in 2010 with a total income of $75,000 and who uses the standard deduction will be subject to a marginal federal tax rate of 25%. If s/he lives in a high tax state like California, the marginal state income tax rate might be as much as 10%. The tax rate on self employment income is 15.3%, but there is a deduction that is allowed for 50% of that tax, which reduces the federal income tax. That represents a savings of 25% times 15.3% or 3.825%. So the combined marginal tax rate on an additional $100 of self employment income would be about 46.5%.
However, if you compute the actual tax based on the multiple tax brackets for the federal and state taxes, and then add the net self employment tax, the total Federal income tax might be about $11,200. The Self Employment tax would be $11,475 and the state income tax might be $6,000. The total actual tax would be about $28,675. When you divide that by the total income of $75,000, the average tax rate is 38.23%.
For a single taxpayer who makes $50,000 of interest income and has no other income or deductions, his marginal federal income tax rate would be 25% and his state income tax rate in a high tax state might be 7% -- for a total of 32%. (The self employment tax would not apply.) But if you compute the actual tax for this person, the average tax rate would be about 18% instead of 32%.
In addition to distorting the argument with average tax rates, the politicians include the non-paying taxpayers in their calculations. Roughly half of the families in the U.S. do not pay any federal or state income taxes. If the average rate for those who do pay taxes in 20% and only half the families pay income taxes, the politician will tell us that the average income tax per family is only 10%. But the marginal rate for many of the families that do pay taxes and that are also paying the self employment tax may be closer to 50%.
Vern
www.veronjacobs.com
Tuesday, June 15, 2010
The Real Price of Freedom
For the past six months, I've been reading a lot more books about the issues of the day. A few of the more recent books include
The Road to Serfdom by F.A. Hayek
To Save America by New Gingrich
What's So Great About America? by Dinesh D'Souza
Glenn Beck's Common Sense by Glenn Beck
Drill Here; Drill Now; Pay Less by Newt Gingrich
Myths, Lies and Downright Stupidity by John Stossel
Partly, I've been reading these books for insight into the motivations of the far left, or the "Secular-Socialist Machine" as Gingrich calls it. In spite of abundant evidence that more government simply creates more problems and that Socialism is a flawed approach to governing, the far left has been bull-dozing the legislative landscape with highly Socialist laws that a substantial majority of Americans have clearly said they don't want. In spite of numerous books and articles that demonstrate serious flaws in these proposed laws, the far left is aggressively moving to impose a much bigger government on us.
They claim to be non-partisan, but can't get the support of a single Republican for many of their bills and ram those bills through Congress with deceit and bribery. They blatantly lie to us about cutting taxes, reducing government, dealing with illegal immigration, protecting the environment and much more. They use offshore tax havens and our multi-national corporations as scapegoats for not being able to collect more taxes when the taxes that are collected are being grossly wasted. They talk about energy independence but refuse to utilize any of the effective sources of energy that we already have.
I have finally come to understand that the far left is not motivated by seeking to solve problems.
Their motivation is simply to secure raw and unlimited power.
While it defies common sense, they are intentionally destroying the economy of the U.S. so that all but a tiny fraction of the populace will come meekly like cows and pigs to the government feeding trough. Why? Because that's the only way they can sustain their positions of power. They prefer to be masters of a devastated economy than to be free members of a society of merit and ability. Many of them can't or won't compete in a free market and seek to establish an alternative universe of idealistic equality for all -- except for the leaders of course.
They are supported by a diverse collection of special interest groups, each of which participates in the plunder of the income and property of the people in order to secure political support for narrow and self-serving purposes. The unions seek government help to pass laws that give the unions more power over the workers and employers. The environmentalists want the government to pass laws that devastate the principle of private property and deceive us with false science about global warming. Some farmers support the far left in order to continue their generous farm subsidies. Nonprofit organizations support the far left because of generous grants and tax laws that virtually mandate that wealthy persons leave a large part of their estates to charity. They are supported by academia in exchange for subsidies, influence and even power. And the national media supports them because they seem to believe the Utopian fairy tales about the great benefits of economic equality. Also, the media owners generate a huge amount of ad revenue every two years and many of the largest media are owned by persons of far left persuasion. Even large businesses support the agenda of the far left in exchange for laws that make it extremely difficult for smaller businesses to compete.
And a lot of the people who advocate policies of the far left are highly idealistic and have little interest in such mundane subjects as economics or taxes. In fact, many of them openly disdain the merits of discussing such topics. They simply refuse to discuss why Keynes' theories are false, why lower tax rates produce more tax revenue, how the government causes inflation with the help of the Federal Reserve or why a free market provides the greatest benefit to the poor.
Then there are the younger voters who have limited experience with life and have been supported for 25 or more years by their parents. Despite protests of wanting to be independent, they have a basic belief in the nanny state. Finally, there are the people who truly believe that they know what is best for everyone else and are entirely willing to support laws that impose their views on everyone else.
That's just a sampling of the varied special interest groups that provide financial and political support for the far left.
The prospect of resisting the supporters of the far left seems nearly impossible.
Advocates of freedom are vilified by the far left and get little sympathy from family or even from some friends.
Those who like the status quo are generally those who are getting a substantial benefit of some kind from government. And there are a lot of us who would encounter financial difficulty if there was a dramatic change toward less government. Employees of the federal and state government and their families worry about how they will be able to live if their government agency is closed or drastically reduced in size. Retirees worry about how they will be able to afford health care and whether they can get by without Social Security, Medicare or Medicaid. Union members worry about losing the power of the government to give them leverage over large employers. Contractors who do work for the government worry about their livelihood. Farmers worry about their subsidies. Academia worries about their government research grants. And the large number of people who get some kind of subsidy like low income housing, food stamps, school lunches and a host of other benefits worry about whether they can really afford a smaller government.
So it seems that the real price of freedom is the willingness to give up our respective government subsidies based on a faith that freedom is worth it and that greater prosperity will come from a much smaller government.
Either we have faith in the false promise of equality for all or we have faith in the benefits of a free market, private property, honest money and limited government.
What sort of government funded financial aid do you receive or expect to receive?
Can you live without that support? Is freedom worth it for you?
Before you say "No", read Newt Gingrich's book, "To Save America" and get a copy of The Road to Serfdom by F.S. Hayek.
If we are not willing to be independent of the government, we will soon be little more than the tame pigs and the cows that are used as meat for the owners.
Vern
http://www.offshorepress.com/liberty/
Monday, June 14, 2010
Do T.I.P.S. Really Make Sense?
One of the solutions that is often offered for those who are concerned about inflation is to invest in Treasury Inflation Protected Securities or TIPS.
But for those who accept the logic of the Austrian School of economics, inflation is caused by an expansion of the money supply by the Fed's purchase of otherwise unmarketable U.S. debt securities.
So if we are concerned about inflation arising from recent legislation that will require a huge amount of deficit spending, does it really make sense to invest in government debt that promises to keep up with the inflation that is caused by that same government?
Also, there is a lot of plausible information to support the view that the inflation index that is managed by the government is about 50% of the real rate of inflation. For more about that subject see Shadow Stats.
What kind of investments do keep up with inflation? Think about a combination of precious metals, commodities, short term debt, a paid off residence, tangible things like guns, ammunition and generators.
Can you make a profit by building up a lot of debt during the current recession and then paying off that debt with cheaper (inflated) dollars? Perhaps, but the lenders are also aware of possible future inflation and will be raising rates in anticipation of future inflation. So the question is, can you outsmart the bankers on the timing of future inflation? And can you invest that borrowed money to make an after tax return in excess of the inflation rate?
Vern
www.vernonjacobs.com
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