Sunday, June 26, 2011

Trickle-Down Ignorance

One need not watch An Inconvenient Tax (a film explores the history of the income tax in the United States) in order to be convinced that the current system of income taxation is an utter and complete disaster.

An issue that this documentary did not discuss is the fallacy of "trickle down economics", and the fact that those trying to espouse (or foolishly attack what is actually a fallacious argument anyway) the "trickle down" theory are misguided.  While our politicians are concerned with only rhetoric and short term political gains, Thomas Sowell's columns over the years provide invaluable insight.  Sowell truly is an intellectual heavyweight with the ability to break down the complex into layman's terms.  (His columns can be found here, here, and here.)  One of his best - Trickle-Down Ignorance - is pasted below from Capitalism Magazine:

As much as I enjoy most of the messages from readers, there is no way that I can answer more than a small fraction of them. The messages I don't reply to at all are those from obviously ignorant people who offer insults instead of arguments. However, a recent column has brought forth more than the usual number of uninformed denunciations, so it may be useful to other readers to explain why they should not take such nonsense seriously when they encounter it.
What I said that set off the crazies was that there is no such thing as "trickle-down" economics. Supposedly those who believe in trickle-down economics want to give benefits to the rich, on the assumption that these benefits will trickle down to the poor.

As someone who spent the first decade of his career researching, teaching and writing about the history of economic thought, I can say that no economist of the past two centuries had any such theory.

Some of those who denounced me for saying that there was no trickle-down theory cited an article by David Stockman years ago -- as if David Stockman was the last word, and I should forget everything I learned in years of research because David Stockman said otherwise.

What is often confused with a trickle-down theory is supply-side economics, such as that advocated by Arthur Laffer. That theory is that tax cuts can generate more tax revenue for the government because it changes people's behavior, causing more economic activity to take place, leading to more taxable income, as well as a faster growing economy.

It is not hard to find examples of when this happened -- for example, during the Kennedy administration, among other times and places.

Whether it will happen in a given set of circumstances is what is controversial, but none of this has anything to do with money trickling down from the rich to the poor. It has to do with the creation of more wealth in the economy as a whole.

The notion of a trickle-down theory is debunked on pages 388-389 of my book "Basic Economics" (2nd edition). But most of those who went ballistic over my denial of a trickle-down theory were not seeking further information.

As far as they were concerned, they already had the absolute truth and only needed to vent their anger over my having dared to say otherwise. That is a sign of a much more general and much more dangerous trend in our society today that goes far beyond a handful of true believers foaming at the mouth against one columnist.

If education provides anything, it should be an ability to think -- that is, to weigh one idea against an opposing idea, and to use evidence and logic to try to determine what is true and what is false. That is precisely what our schools and colleges are failing to teach today.

It is worse than that. Too many teachers, from the elementary schools to the graduate schools, see their role as indoctrinating students with what these teachers regard as the right beliefs and opinions. Usually that means the left's beliefs and opinions.

The merits or demerits of those ideas is far less important than whether or not students learn to analyze and weigh those merits and demerits. Educators used to say, "We are here to teach you how to think, not what to think."

Today, students can spend years in educational institutions, discussing all sorts of issues, without ever having heard a coherent statement of the other side of those issues that differ from what their politically correct teachers say.

There are students in our most prestigious law schools who have never heard arguments for the social importance of property rights -- not just for those fortunate enough to own property, but for those who don't own a square inch of real estate or a single share of stock. How they would view the issues if they did is a moot point because they have heard only one side of the issue.

People who go through life never having heard the other side of issues ranging from environmentalism to minimum wage laws are nevertheless emboldened to lash out in ignorance at anyone who disturbs their vision of the world. The self-confident moral preening of ignoramuses is perhaps an inevitable product of the promotion of "self-esteem" in our schools.

Monday, June 13, 2011

Competition Lowers Prices

Everyone is now painfully aware of the risings costs of health care.  However, it is extremely unfortunate that many still do not know why health care costs are increasing:  too much government interference and not enough competition.

Dr. David Gratzer of The Manhattan Institute has been discussing the desperately needed amendments to the Public Service Health Act for years.  He now writes that the Patient Un-protective and Un-affordable Care Act certainly does not foster competition, and merely creates 50 different variations of chaos:

Health Reform Creates Chaos With 50 States, 50 Sets Of Rules

“Toto, we’re not in Kansas anymore.” The line from the Wizard of Oz comes to mind with reports of the ongoing implementation of ObamaCare. In Kansas, the state government is reportedly charging ahead, excited to receive $32 million as its share of $241 million in federal grants. Kansas is eligible for the cash because it will be among the first 7 states to launch one of the health-insurance exchanges the law calls for.

There’s some irony here. After all, the State of Kansas is also suing the federal government to declare ObamaCare unconstitutional. But the bigger irony is that anyone’s in any hurry to open a health exchange at all, given current legal constraints.

Although ObamaCare is mostly a patchwork of bad ideas, President Obama’s earliest proposal for health reform actually included a very good idea: the plan for a national health exchange, similar to what federal employees use to buy their own health insurance.

A national insurance market would have allowed consumers to compare insurance costs across state lines. This would have helped to curb high costs in states which artificially raise the price of health insurance through unnecessary benefit mandates and other regulations.

If the president had carried through with his rhetoric on a national health exchange, consumers could soon be buying insurance plans that suited them directly, from any state they chose, comparing low-cost and high-cost plans without regard for artificial regulatory boundaries. In turn, lower-cost insurers could have marketed new products to lower-income customers more easily, since it would be easier to make a fair return on a basic health plan if it could be sold to a national market.

In the current model, discount insurers must re-price and repackage insurance plans for 50 small markets and 50 sets of regulations.

But Obama’s support for a competitive marketplace was short-lived. Liberal politicians at the state and national level woke up and realized that a national market would bring to an end their habit of micromanaging insurance rules and curb their ability to reward different constituencies with costly “benefit mandates” which serve in practice as a subsidy for provider lobby groups and special interests.

It didn’t take long for the president’s national health care marketplace to be refried, reheated, and served up as 50 individual state websites instead.

Remember: One of the stated objectives of ObamaCare was to foster free-market insurance competition to cut prices.

Now, with 50 uncompetitive state markets and new federal regulations on what is or isn’t an acceptable insurance plan on top of existing state laws, there will actually be less room for

price-cutting competition in health care. You can expect insurance costs to rise as a direct result.

Even isolated to individual states, the health exchanges will serve a purpose: Consumers using an exchange to buy coverage will have an easier time accessing the hundreds of billions of dollars’ worth of new federal insurance subsidies that ObamaCare provides.

While that’s good short-term news for American families who need the subsidies to purchase coverage, it only serves to increase the health care system’s dependence on money borrowed by governments on your credit. It will do nothing to make America’s health care system more affordable in the long term.

To understand why ObamaCare is such an enormous policy failure, it helps to look at the rest of the online world and the online markets we all know and love.

EBay works because a collectible you couldn’t possibly sell at a garage sale in Centerville, Iowa, might sell quickly if buyers in Texas, California and Georgia knew it was for sale. does well partly because it can stock anything it wants, trumping bookstores in your hometown that might not sell the Civil War book you’re looking for.

Recreate these online marketplaces with ObamaCare-style rules and you’ll understand the problem. Imagine shopping on Amazon, but not being allowed to buy books that are already sold by retailers within your home state. Imagine an eBay where customers have to physically live in the same state as the person making the sale before they can enter a bid.

Yes, Kansas will be a national leader when it opens up its health exchange, which it expects to do sometime in 2013. But here’s the problem, Toto: When the Kansas health exchange opens online, you’ll still be trapped in Kansas — at least as far as markets and health-insurance regulations are concerned.

Monday, June 6, 2011

Debt Issuance and Spending Cuts

This week the Treasury will be auctioning off the following:

$27 Billion in 13-week Bills on June 6, 2011
$24 Billion in 26-week Bills on June 6, 2011
$32 Billion in 3-year Notes on June 7, 2011
$21 Billion in 10-year Notes on June 8, 2011
$13 Billion in 30-year Bonds on June 9, 2011

After pledging to cut $100 billion, the House Republican leadership was only able to cut a pathetic $38 billion.  This weeks debt issuance, which is consistent with previous auctions, puts the cuts of $38 billion in perspective.  The question now remains; will the federal government heed the advice of Stan Druckenmiller to demand substantial spending cuts and enact true entitlement reform?

Some highlights of Druckenmiller and his interview with James Freeman (added information not included in the interview shown in parentheses):

 - Druckenmiller and his wife gave away over $700 million to charity in 2009.
 - Druckenmiller has been credited with orchestrating George Soros's successful shorting of the British pound in 1992 (earning one billion dollars of profit in a single day).
 - After working for Soros, Druckenmiller also built his own fund, Duquesne Capital, which at one point had $12 billion in AUM (as of August 2010, Duquesne Capital's returns had averaged 30 percent annually since 1986).
 - Forbes estimates Druckenmiller is still worth $2.5 billion, despite his generous charitable givings.
 - Druckenmiller, over the last two decades, has been the largest benefactor of the Harlem Children's Zone, a community service organization featured in the movie "Waiting for Superman".
 - Druckenmiller was accused by (the now disgraced former Treasury Secretary) Robert Rubin of wrongdoing in the Treasury market, however Druckenmiller was long Treasuries at the time, and is long Treasuries now (despite Rubin's accusation otherwise).
 - Druckenmiller spoke up about his concerns with the our fiscal situation in 1995 and noted that the first baby boomers would turn 65 in 2010.  He know states that we do not have another 16 years to get things in order.
 - He stated that the Treasury market is not a free market, nor is it a clean market due to The Federal Reserve buying much of Treasury bonds through QE2 to the tune of $19 billion of Treasurys a week.

Druckenmiller has proven expertise in the Treasury market and other fixed income markets.  Our political "leaders" would be making a major mistake not listening to him.

Sunday, June 5, 2011

Enough Clamor and Hyperbole

Stanley Druckenmiller was recently interviewed by the The Wall Street Journal:

'A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we're behaving," says Stanley Druckenmiller, the legendary investor and onetime fund manager for George Soros. Is this another warning from Wall Street that Congress must immediately raise the federal debt limit to prevent the end of civilization?

No—Mr. Druckenmiller has heard enough of such "clamor and hyperbole." The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending.

One of the world's most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government's ability to pay for its future obligations that he's willing to accept a temporary delay in the interest payments he's owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs.

"I think technical default would be horrible," he says from the 24th floor of his midtown Manhattan office, "but I don't think it's going to be the end of the world. It's not going to be catastrophic. What's going to be catastrophic is if we don't solve the real problem," meaning Washington's spending addiction.

Widely credited with orchestrating Mr. Soros's successful shorting of the British pound in 1992, Mr. Druckenmiller also built his own fund, Duquesne Capital, into a $12 billion titan. He announced plans last year to close the fund and now reports, "I have no clients." He is still managing his own money, which Forbes magazine recently estimated at $2.5 billion.

Whatever the correct figure is, it would be significantly larger if Mr. Druckenmiller hadn't given away so much of his wealth. The online magazine Slate reported last year that Mr. Druckenmiller and his wife gave away more money in 2009—over $700 million—than anyone else in the country. Over the last two decades, he has been the largest benefactor of the Harlem Children's Zone, a community service organization featured in the movie, "Waiting for 'Superman.'"

It's hard to think of someone with more expertise in the currency and government-debt markets, but Mr. Druckenmiller's view on the debt limit bumps up against virtually the entire Wall Street-Washington financial establishment. A recent note on behalf of giant banks on the Treasury Borrowing Advisory Committee warned of a "severe and long-lasting impact" if the debt limit is not raised immediately. The letter compared the resulting chaos to the failure of Fannie Mae and Freddie Mac and warned of a run on money-market funds. This week more than 60 trade associations, representing virtually all of American big business, forecast "a massive spike in borrowing costs."

Wednesday, June 1, 2011

Ending Earmarks

We have now heard the left, the right, and even libertarians belittle the impact of earmarks.

- The left, albeit inconsistent and sometimes hypocritical, have minimized the significance of earmarks.
- The right has also stated that earmarks are not an issue of concern.  Mark Levin - someone that this site references quite often due to his accurate criticisms of an over-reaching federal government and his expertise in constitutional law - has stated on his radio show that earmarks are not a pressing matter.
- The libertarian Ron Paul has written that earmarks are a "distraction" and "phony issue".

With all due respect to the aforementioned individuals and groups (Mark Levin / conservatives and Ron Paul / libertarians):  They are wrong.  Earmarks incentivize legislators to vote for a bill that they would otherwise not vote for.  Therefore, if one is to address the big picture of (out-of-control) federal spending, then one must address the incentives for legislators to approve and vote for such bills.  After all, people respond to incentives.

In order to gain votes, the sponsors of a particular bill will include earmarks that designate funds to be appropriated to particular districts of legislators that are either against or neutral on the legislation in question.  This creates a moral hazard, as overall spending (in large omnibus spending bills or health care takeover bills) are passed due to the presence of earmarks.

Earmarks - essentially legalized bribery - manipulate and distort the way our lawmakers vote, and therefore should be identified and chastised at minimum; or preferably banned and ended altogether.