Thursday, December 29, 2011

The Albert Pujols tax

The politically correct world of income equality has emerged in California in the form of the Albert Pujols tax. Ostensively, it is call the Kim Kardashian tax. The group is adopting the tired mantra that millionaires such as Kardashian are “not paying their fair share” and should be taxed more. The group calling itself the “Courage Campaign” wants those with incomes of $1-2 million to pay 3 percent more and 5 percent more if they make over $2 million. The bold – and wrong – claim is that this will raise state tax receipts by $6 billion a year. Of course this assumes that no one moves or shelters income. Of course if Kardashian threatened to move to Nevada, that state would probably enact a Kardashian specific tax to keep her out. That Ms Kardashian has been targeted is because despite her popularity (or notoriety) apparently she is also intensely disliked. If she has political views, they are not well known. “Courage” Campaign could have easily targeted Michael Moore, Morgan Freeman, Sean Penn or Meryl Streep. But of course those are the “good rich”. So what about Mr Pujols? He just signed a $250 million contract with the Los Angeles Angels of Anaheim rather than a competing contract with the Miami Marlins. I wonder if he now regrets moving to a high tax state instead of one with no state income tax since there is no way he will be able to avoid it. On a different level, it is really disturbing that the voters are allowed to take such punitive actions against their fellow citizens. However, lets take a microeconomic view of millionaires and the concept of marginal utility which says that each incremental unit conveys less value to the consumer. Total satisfaction is increasing but marginal satisfaction is decreasing. The empirical question is where does the marginal satisfaction of acquiring one more dollar decrease to the point where the earner is indifferent? Surely that point for Bill Gates is different from some relative pauper making $1 million. When the earner is at the point of indifference then the additional dollars can be taxed at higher rates without an appreciable change in behavior up to the point where the millionaire ceases to be indifferent about the increased tax burden. I doubt very seriously if that point is at one million for Californians or if Obama had his druthers $250,000 for the rest of us.

Saturday, December 17, 2011

Are all fossil fuels from fossils?

The current dustup over the Keystone pipeline has conjured up one of my nagging questions. Call me crazy but I have always been skeptical of those who assert that we will run out of fossil fuels. This has always been a basis for advocating "alternative" or "renewable" energy as well as all the hand wringing on CO2 emissions. I guess the animals are not dying quick enough and decomposing rapidly enough to keep up with demand and even if they were we would die of pollution and global warming first. However, a couple of years ago I recall reading an article in Scientific America that indicated that my speculation was not entirely fanciful ( It is about a process know as abiogenic hydrocarbon genesis. Here ethane and heavy hydrocarbons are produced under pressure below the earth's crust. This may not be entirely fanciful since some scientists have argued that the new oil and gas discoveries well below the surface of the earth could not have originated from fossils due to the depth of the reservoirs. If this is true then the world will not run out of oil and gas regardless of the rate of demise in animals and plants. Such a discovery would speed up all the deep drill technologies and decrease the importation of oil world wide as more and more finds would occur throughout the world.

Monday, December 5, 2011

Is "social justice" just?

Return with me now to those thrilling days of yesteryear. When I was in college “social justice” meant the equality of opportunity. Blacks wanted an equal opportunity to attend the University of Georgia rather than being denied admission based solely on race. The university insisted that there were no qualified blacks applicants. I have heard some people whine about EEO saying that the blacks hired will be looked down upon by the whites because if it were not for EEO they would not be there. Give me a break. Can you imagine the pressure we first blacks at Georgia were under where the other students thought “well if the courts had not ordered their admission, they would not be here on merit.” Some thought that some of us had chips on our shoulders – mine was a 2x4. My attitude was “lets see if anyone in here is smarter than I am.” Virtually all of us who graduated from there in the 1960s were high achievers with terminal degrees and of the first two admissions, one is a Pulitzer prize winner and the other was and orthopedic surgeon and hospital CEO.

Now social justice is less defined amalgamating into whatever the utterer means. Like all of us I hear the words “social justice” bandied about. Everyone nods their heads thinking they know what that means – except me. I haven’t a clue what is meant by “social justice”. So I proceeded to google it. There is a clear definition found in the Center for Economic and Social Justice's website. It is "Social justice encompasses economic justice. Social justice is the virtue which guides us in creating those organized human interactions we call institutions. In turn, social institutions, when justly organized, provide us with access to what is good for the person, both individually and in our associations with others. Social justice also imposes on each of us a personal responsibility to work with others to design and continually perfect our institutions as tools for personal and social development." Great definition but how is the term used? The web is a mishmash of topics: from bisexual/transgender equality to anti-smoking. There is Catholic social justice (which presumably does not include abortion rights) and Universalist Unitarian social justice (which does). There is even something called “ethical eating” which is probably PETA friendly. Environmental justice. Humane labeling (huh). And “slow food”? Must be the pro-crock pot crowd. From now on, when you hear someone spout the words “social justice”, say “define it”. If they can’t then tune them out – or simply say “you are an idiot”. More times than not I bet you will hear some disjointed, illogical ramblings which will invariably lead to some socialist collective solution for some imagined problems. Now I am in favor or putting all the bisexual/transgender-environmentalist-PETA friendly- humane labeling- slow food crowd into their own collective. The irony is that the social justice crowd wants to impose their values on the rest of us. Well that imposition is the opposite of justice. However, the important question is whether the Catholics and the Unitarians are socialist collectivists.

The payroll tax reduction: Only in Washington does this make sense

File this under the "I don't get it" category. We all know that social security is in trouble. It is a pay as you go system with current receipts paying current recipients. At some point in the near future, the payments to the recipients are projected to exceed the receipts creating a shortfall that must either be made up with tax receipts or decrease benefits. So why did the congress reduce the payroll tax? This reduces the projected payments into social security by $265 billion. Won't this make the day of reckoning even sooner? To add to my confusion, the president has advocated that the payroll tax reduction continue for an additional year. You can imagine my surprise when I heard him say and other dems repeat that increasing the amount of money in the hands of Americans is critical during these days of economic crisis. Of course if they really believe this as opposed to it being a mere talking point, they would make permanent by Bush tax rates and move to lower income taxes across the board (even to the so-called 1 percent). Since a reduction in taxes on a permanent basis leads to increased income, the result will be more paid into social security rather than less. Thus, what should have been done is to leave the payroll tax rate alone and to reduce income taxes instead. Only Washington could screw things up this badly.

Well they didn't get them all right: They left off the "State"

Here is the cover of Sports Illustrated College football preview issue back in August ( Note that their top four teams are 1. Alabama 2. Oklahoma 3. LSU and 4. Stanford. Could we get those guys to pick my stocks? As to the Heisman winner, their final three are Landry Jones (now eliminated because of Oklahoma's dismal and disappointing - for them - season), Trent Richardson and Andrew Luck. Want to better that they got the final two right? Their winner? Andrew Luck.

The negative income tax

The great Milton Friedman died on November 16, 2006 and we all have been worse off due to his passing. Friedman was a generator of ideas and possessed great vision and instinct based on micro economics. Some have misinterpreted his conclusions in the Monetary History of the United States by contending that he criticized the Fed for not inflating the currency during the Great Depression saying that this is why the current Fed has acted in such an irresponsible manner. Not so. Friedman was an advocate of steady money growth (the Quantity Theory of Money) and disliked discretionary monetary policy as being inherently destabilizing. Thus, he was critical of the Fed for allowing the money supply to contract by one-third during 1932-1933 which caused the Great Depression. Friedman always said that if the Fed had kept the money supply at a constant level, we would have had a recession and not a depression. Now it is time for consideration of another Friedman idea, the negative income tax. Perhaps the only positive byproduct of the republican presidential race has been the uniform notion to blow up the income tax structure in the United States with either a flat tax, or a value added tax, or a combination of the two (Cain's 999). The problem with these proposals is that although they would eliminate all other federal taxes, they would leave the structure of federal income redistribution unchanged. This would change with a negative income tax. Friedman's negative income tax would be coupled with a flat tax. These would not only replace all of the federal taxes (income. FICA, and excise) but would also replace all social redistribution programs (Social security, food stamps, housing subsidies, and all welfare programs) and eliminate minimum wages as well. The negative income tax would guarantee a certain income floor for all citizens. If a person earned above the floor then in Friedman's world they would keep a set declining percentage of each dollar earned up to some maximum level of income. Then the flat tax would kick in at that higher income. The advantage of this program would be that low income earners would have a positive incentive to work because they would keep more of their income. This is in contrast to the present system of disincentives where if you work you might lose the government assistance completely. The key to the negative income tax is that the guaranteed floor (say the so-called poverty level) cannot exist for an able bodied adult regardless of incentives to work or else the slothful amongst us would opt not to work. However, for those who want to do better and to have a brighter future for their children, the system would work. Lastly, I would advocate the elimination of all government transfers period (such as tax credits, farm subsidies, and corporate welfare). It seems to me that if we really want to blow up the income tax, we might as well blow it all up.

Thursday, December 1, 2011

Why is the failure of statism being foisted on us as a failure of capitalism?

On a local radio show I was asked to defend capitalism. I observed that it was interesting that capitalism was currently being attacked as a failed system based on the past four years or so. The irony is that rather than it being exhibited that capitalism had failed it was rather that statism had failed. Capitalism is not the bailouts of the financial institutions, the nationalization of Fannie Mae and Freddie Mac, the takeover of Chrysler and General Motors, the stimulus packages. the takeover of health care, cap and trade and the myriad of the intrusions of the federal government into the economy. I said that this is a recipe for permanent European levels of unemployment, inflation, low productivity and lower standards of living. What follows is more to that point.

From the Wall Street Journal

A European's Warning to America
The perils of following us toward greater regulation, higher taxes and centralized power.

On a U.S. talk-radio show recently, I was asked what I thought about the notion that Barack Obama had been born in Kenya. "Pah!" I replied. "Your president was plainly born in Brussels."

American conservatives have struggled to press the president's policies into a meaningful narrative. Is he a socialist? No, at least not in the sense of wanting the state to own key industries. Is he a straightforward New Deal big spender, in the model of FDR and LBJ? Not exactly.

My guess is that, if anything, Obama would verbalize his ideology using the same vocabulary that Eurocrats do. He would say he wants a fairer America, a more tolerant America, a less arrogant America, a more engaged America. When you prize away the cliché, what these phrases amount to are higher taxes, less patriotism, a bigger role for state bureaucracies, and a transfer of sovereignty to global institutions.

He is not pursuing a set of random initiatives but a program of comprehensive Europeanization: European health care, European welfare, European carbon taxes, European day care, European college education, even a European foreign policy, based on engagement with supranational technocracies, nuclear disarmament and a reluctance to deploy forces overseas.

No previous president has offered such uncritical support for European integration. On his very first trip to Europe as president, Mr. Obama declared, "In my view, there is no Old Europe or New Europe. There is a united Europe."

Barbara Kelley
I don't doubt the sincerity of those Americans who want to copy the European model. A few may be snobs who wear their euro-enthusiasm as a badge of sophistication. But most genuinely believe that making their country less American and more like the rest of the world would make it more comfortable and peaceable.

All right, growth would be slower, but the quality of life might improve. All right, taxes would be higher, but workers need no longer fear sickness or unemployment. All right, the U.S. would no longer be the world's superpower, but perhaps that would make it more popular. Is a European future truly so terrible?

Yes. I have been an elected member of the European Parliament for 11 years. I have seen firsthand what the European political model means.

The critical difference between the American and European unions has to do with the location of power. The U.S. was founded on what we might loosely call the Jeffersonian ideal: the notion that decisions should be taken as closely as possible to the people they affect. The European Union was based on precisely the opposite ideal. Article One of its foundational treaty commits its nations to establish "an ever-closer union."

From that distinction, much follows. The U.S. has evolved a series of unique institutions designed to limit the power of the state: recall mechanisms, ballot initiatives, balanced budget rules, open primaries, localism, states' rights, term limits, the direct election of public officials from the sheriff to the school board. The EU places supreme power in the hands of 27 unelected Commissioners invulnerable to public opinion.

The will of the people is generally seen by Eurocrats as an obstacle to overcome, not a reason to change direction. When France, the Netherlands and Ireland voted against the European Constitution, the referendum results were swatted aside and the document adopted regardless. For, in Brussels, the ruling doctrine—that the nation-state must be transcended—is seen as more important than freedom, democracy or the rule of law.

This doctrine has had several malign consequences. For example, it has made the assimilation of immigrants far more difficult. Whereas the U.S. is based around the idea that anyone who buys into American values can become American, the EU clings to the notion that national identities are anachronistic and dangerous. Unsurprisingly, some newcomers, finding their adopted countries scorned, have turned to other, less apologetic identities.

The single worst aspect of Europeanization is its impact on the economy. Many Americans, and many Europeans, have a collective memory of how Europe managed to combine economic growth with social justice. Like most folk memories, the idea of a European economic miracle has some basis in fact. Between 1945 and 1974, Western Europe did outperform the U.S. Europe happened to enjoy perfect conditions for rapid growth. Infrastructure had been destroyed during the war, but an educated, industrious and disciplined work force remained.

Human nature being what it is, few European leaders attributed their success to the fact that they were recovering from an artificial low. They convinced themselves, rather, that they were responsible for their countries' growth rates. Their genius, they thought, lay in having hit upon a European "third way" between the excesses of American capitalism and the totalitarianism of Soviet communism.

We can now see where that road leads: to burgeoning bureaucracy, more spending, higher taxes, slower growth and rising unemployment. But an entire political class has grown up believing not just in the economic superiority of euro-corporatism but in its moral superiority. After all, if the American system were better—if people could thrive without government supervision—there would be less need for politicians. As Upton Sinclair once observed, "It is difficult to get a man to understand something when his job depends on not understanding it."

Nonetheless, the economic data are pitilessly clear. For the past 40 years, Europeans have fallen further and further behind Americans in their standard of living. Europe also has become accustomed to a high level of structural unemployment. Only now, as the U.S. applies a European-style economic strategy based on fiscal stimulus, nationalization, bailouts, quantitative easing and the regulation of private-sector remuneration, has the rate of unemployment in the U.S. leaped to European levels.

Why is a European politician urging America to avoid Europeanization? As a Briton, I see the American republic as a repository of our traditional freedoms. The doctrines rooted in the common law, in the Magna Carta, and in the Bill of Rights found their fullest and most sublime expression in the old courthouse of Philadelphia. Britain, as a result of its unhappy membership in the European Union, has now surrendered a large part of its birthright. But our freedoms live on in America.

Which brings me to my country's present tragedy. The fears that the American patriot leaders had about a Hanoverian tyranny were exaggerated. The United Kingdom did not develop into an absolutist state. Power continued to pass from the Crown to the House of Commons.

Until now. Nearly two and a half centuries after the Declaration of Independence, the grievances it adumbrated are belatedly coming true. Colossal sums are being commandeered by the government in order to fund bailouts and nationalizations without any proper parliamentary authorization. Legislation happens increasingly through what are called standing orders, a device that allows ministers to make laws without parliamentary consent—often for the purpose of implementing EU standards.

How aptly the British people might today apply the ringing phrases of the Declaration of Independence against their own rulers, who have "combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws."

So you can imagine how I feel when I see the U.S. making the same mistakes that Britain has made: expanding its government, regulating private commerce, centralizing its jurisdiction, breaking the link between taxation and representation, abandoning its sovereignty.

You deserve better, cousins. And we expect better.

Mr. Hannan is a member of the European Parliament. This essay is adapted from the Encounter Books Broadside, "Why America Must Not Follow Europe."

Animal spirits and the stock market

The recent dramatic surge of 490 in the stock market over the news regarding the Fed and other central banks to lower the cost of banks outside the US to borrow cheaper dollars from their central banks is a head scratcher. First, the liquidity swaps are only related to European money markets and have absolutely nothing to do with the fundamental causes of the debt crisis - too much government spending. Second, it is a short term patch expiring in February 2013. Third, it is another slap in the face of finance fundamentals as taught in our universities. The price of a stock is supposed to reflect the market's long term assessment of the value of the firm rather than a short term temporary action (unless that action has a long term impact). Certainly it is true that the profitability of American internationals are dependent upon European markets. But I have seen little evidence that the resolution of their current liquidity crunch would have a great impact on firm profitability. It is similar to the volatility in the market that learned observers have attributed to the Greek financial crisis. Nonsense. Greece is a rounding error and its default would have little noticeable impact on US financial firms and internationals. It is as though those learned analysts are grasping at straws to come with an explanation as to what is going on in today's markets. I guess they cannot tell the truth which is "I don't know."