When Will The Economy Turn Around ?

During long periods of financial prosperity, people feel optimistic and are confident their income will continue to increase. So they are eager to borrow money to buy stuff now rather than having to wait. Even with moderate inflation, there is a feeling that prices will be higher in the future, so it is better to buy now.

But when the economy turns around and people start to lose their jobs or have to take big pay cuts, they quickly adopt an opposite attitude toward the future. They are not confident they can repay more debt in the future or that prices will increase. So they start to reduce their debts and to accumulate assets by cutting way back on every kind of discretionary expense.

At the same time, the banks, credit card companies and other lenders that have been overly eager to extend credit begin to adopt a far more conservative practice about making further loans. So even if people want to borrow, there is less money available.

The government sees this as a bad thing because this kind of behavior will put more downward pressure on prices and will lead to less buying and therefore to more business failures and to more unemployment. Voters get angry. Politicians worry about being voted out of office. So they jump on the stimulus bandwagon and agree to use borrowed money to prime the economic pump and to bail out businesses that are deemed "too big to fail".

The stimulus and bailouts provide a lot of people with money but it does not cause people to feel optimistic about the future. Businesses with non-essential goods and services continue to suffer and go broke, adding to the unemployment statistics.

To a large extent, the bailouts, stimulus and extended unemployment benefits simply delay the point when the excesses of the earlier financial bubble are gone, when businesses that have survived are lean and mean and when the unemployed are willing to accept jobs that are far less lucrative than the ones they enjoyed during the boom times. And everyone except the government has been reducing their debt or accumulating savings.

Gradually, businesses begin to rebuild their inventories and some entrepreneurs embark on new ventures that require them to hire some of the unemployed. Little by little, pessimism and fear give way to cautious optimism and the economy begins to recover. But the more the government continues to intervene, the longer it will take.

Just my two cents.

Vern
www.vernonjaccobs.com

End the Health Care Mandate?

Ron Paul, (R-Tx) has introduced a very short bill to "End the Mandate" in the health care bill that requires everyone to obtain a minimum amount of health care insurance or to pay a fine. This extremely short proposed bill (HR 4995) would simply end the mandate and would make no other changes in the health care legislation. One problem that has been mentioned by opponents of Paul's bill is that is does not also eliminate the mandate for insurance companies to provide coverage for people with a pre-existing condition. If Paul's bill were to become law, it would encourage people to wait until they have a medical problem before they buy health insurance. The insurance industry is therefore very likely to oppose this bill to end the mandate. And while I strongly support the sentiment about getting the government out of the health care business, I believe this is an overly simplistic solution that would create more problems in the unlikely event that it were to become law.

However, Paul has also introduced a more extensive bill (HR 5444) to repeal the entire Patient Protection and Affordable Health Care Act and to replace it with a number of changes in the law to encourage more competition in the health care industry and a more equal tax treatment of health care costs. The bill also offers a novel way to deal with the problem of malpractice during surgery. So while I can't support the bill to end the mandate, I can certainly support his bill to simply repeal the entire health care act and to eliminate some obstacles to competition in the health care marketplace.

Ending the mandate is a catchy sound-bite that grabs our attention, but like many sound-bites, it papers over some serious complications. I wish Paul's supporters would spend more time and effort in promoting his bill to simply repeal the health care act in its entirely. For more on this topic, see

End the Mandate
http://www.house.gov/apps/list/speech/tx14_paul/EndMandate.shtml

http://www.ronpaul.com/legislation/end-the-mandate/

http://www.chooseliberty.org/hr4995.aspx?pid=cz01

Private Option Health Care Act (Repeal the Health Care Act)
http://www.house.gov/apps/list/speech/tx14_paul/PrivateOptHealthcare.shtml

http://www.ronpaul.com/legislation/private-option-health-care-act/End the Health Care Mandate?

Vern
www.vernonjacobs.com

If I pay Less Will You Pay More?

A scholarly analysis of the IRS penalties versus the excessive fines clause of the Constitution concluded with the statement (in part) that

"When one taxpayer pays less, we all pay more."

This is also an often used comment by various IRS officials. But is it true?

If it is true, it means that the government somehow arrives at some budgeted amount that is somehow divided among all taxpayers. Furthermore, if the full amount that is budgeted isn't collected in the current year, it must somehow be picked up in a later budget year.

And what happens when a lot of taxpayers lose their jobs and end up paying less taxes? Do the rest of us have to somehow make up for that lost tax revenue?

If that's true then every time the government introduces some kind of new targeted tax incentive (aka special interest tax expenditure), all of the taxpayers who are not part of the favored group must have to somehow make up for the shortfall. And what about the fact that roughly 50% of the households in the U.S. don't pay any income taxes at all? Clearly, the other half must make up for the shortfall.

However, it doesn't really work that way.

First of all, this cliche' presumes that the expense side of the budget can't be changed. Is that the way things are in your household or business? If there is a shortage of revenue, don't you make up for the difference by either borrowing (if you can) or by cutting back on expenses if borrowing is not an option? And if the loss in revenue persists (or is expected to persist), you start cutting some expenses, like the cruise you wanted to take or the new car you were going to buy. In extreme cases, you might even downsize by moving to a smaller home and selling some stuff.

With the federal government, there is a lot more opportunity to borrow the funds, which are rarely repaid. The annual deficit is just added to the accumulated national debt which results in having to pay more interest. But the debt isn't repaid -- it is just rolled over from year to year. And if the debt gets to be too much, we pay off some of it with new money courtesy of the Federal Reserve. Of course we try to do that gradually because if we print too much too fast, it would upset all of our trading partners around the world. (Because our money would lose value.)

Back to the question. If I somehow pay less taxes by not working or by getting a cut in pay or by using some sort of obscure tax break, do you have to pay more? The answer is no! There is no connection because the government has an almost unlimited ability to borrow money.

But I can hear a few readers asking, "O.K., if that's true why do they need to collect taxes at all?" And my humble two cents on the question is that they don't have to collect taxes as long as they have the Federal Reserve available to create new money in exchange for new treasury obligations. But doing that would make it obvious that inflation is actually a substitute for taxes.

Vern

Fight or Flight?

The political left try to divert the real objectives of the Tea Party movement by arguing that taxes are low for the middle class and that Obama intends to continue the Bush tax cuts for those making less than $200,000 per year. (Those on the bottom half of the economic spectrum don't pay any income taxes.)

But the Tea Party people aren't complaining about current tax levels. They see the huge amounts of deficit spending and the costly laws that the liberals are passing or trying to pass and they understand that huge deficits and enormous levels of debt will translate into either higher taxes or inflation or a combination of the two.

So the members of the Tea Party are organizing and exchanging information in order to replace the liberal members of the Congress with candidates who seem to reflect the goals of the Tea Party for a smaller government, less spending and less taxes. Of course, voting for newcomers is a lot like buying the proverbial "pig in a poke". We won't know if the new comers are just jumping on a bandwagon or are sincere in their intentions and have the fortitude to resist the siren call of power and influence.

Meanwhile, there are some of us who remember the very limited success of the "Contract with America" where a lot of newcomers went to Washington and quickly got indoctrinated with the way things are done in the "Land of Oz." (The crystal city was not in Kansas; it was in Washington.)

I currently have four clients who have retained me to help them with the paperwork to expatriate. That means they are going to give up their U.S. citizenship. For those who don't have any confidence that the Tea Party or anyone else can really change things in Washington, flight is their choice. And there are many indications that flight is becoming the choice for a lot more people.

For myself and my wife, we are at an age and have a family situation such that we are going to stay. Since we have ruled out the choice of flight, we intend to do what we can to join the fight -- even if past efforts to turn things around were not successful. At a minimum, I will continue to share what I'm learning about the issues with those who may have an interest in one more voice for freedom.

As Glenn Beck and some other have concluded, the first step is for all of us to learn about the history of the Progressive Liberal movement so that we can better understand what is happening now. The second step is for each of us to share our discoveries with others and to encourage them to become politically aware.

Just my two cents.

I invite you to visit my Liberty portal at http://www.offshorepress.com/liberty/

Vern

Do Tax Cuts Cause Deficit?

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

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

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