Equity Based Economy

Analyzing new stuff

2009-04-17T08:32:00.000-07:00

I will take this weblog in a more analytical direction henceforth, by analyzing, with respect to the principles and axioms presented earlier, programs and policies which are planned or just beginning. I would be very interested to know what current government program or proposal you would like to see dissected in this way. Please write me a comment to that effect. In any event, I will also continue to make my own selections.

The international scene in 2025

2009-04-16T08:23:00.000-07:00

We don’t go to war much these days because use of Cost-Benefit Analyses continues to bring home, before we invade anyone, the high cost of doing so. We are now less easily provoked and we interfere less in the affairs of other countries. Since we no longer build up the armies of friendly dictators, there is a little less persecution of the helpless in the world. With the new immigration-friendly policy, our country has grown larger and stronger. And we now treat foreign nations with respect by honoring the principles that will lead them to economic efficiency just as those principles have guided us; in other words, we now invest in people rather than in governments.

We have eliminated tariffs and we do not fear competition in world trade. This is because we invest overseas, by buying land and building businesses, and also by staking entrepreneurs in other countries instead of their governments. These approaches have helped to reduce illegal immigration. While poverty and disease have not been wiped out, we now see pockets of economic strength among citizens of the poorest countries; these are the people who will carry their societies to prosperity.

Our decriminalization of narcotics and our withdrawal from the drug war has drained much of the life from international drug dealers and cartels. This has helped to stabilize Mexico and allowed our two countries to focus on building a human-friendly border. When bandits, pirates, terrorists, or rogue states harass American citizens or otherwise threaten American interests, the relentless pursuit of justice follows, accompanied at times by swift, violent reprisals. These bold actions, which have replaced endless negotiations, invasions, and expensive experiments in nation-building, have had the effects of raising costs to adversaries and reducing risks to American citizens.

Federal taxes and local schools in 2025

2009-04-15T08:16:00.000-07:00

Calculating taxes is now easy. At the end of the year I simply add my wages, interest income, and capital gains, subtract the zero-tax number, and multiply by the flat tax rate. If the number is negative, the government owes me money; if it is positive, I owe them. In most cases, the calculation is so easy that with-holding generally puts me within a few hundred dollars of the correct amount. In any event, I can choose to adjust my debt or credit balance through a temporary change in with-holding. Privately owned businesses still have records to keep, but reinvestment in the business, consistent with the Life-Savings philosophy, is not taxed.

Our children are better educated now. Eliminating the Federal Department of Education has meant more money going straight to where it is needed most, to our schools. Imagine, back in 2009 we looted our cities of over $50 Billion to fund that department, about $1 Billion per state. Well-educated children will keep our country’s future bright.

Homelessness in 2025

2009-04-13T21:31:00.000-07:00

One issue that no longer plagues cities is homelessness, which is now illegal; let me explain. When we adopted the (flat and) negative income tax, we made it possible to finance more comprehensive accommodations for the homeless, something started on a significant scale in San Francisco at the turn of the century. It was not possible for an individual city to take responsibility for the homeless on its own without becoming a magnet for other homeless people. Therefore, it was decided to distinguish between those who could and could not shelter themselves. Those who cannot shelter themselves now must enter into a government-regulated, privately-operated dormitory. Such dormitories, which operate at a profit but must meet government standards to continue to operate, have opened across the country. Residents pay their room and board by signing over their negative-tax payments to the dormitory.

While at the dormitory, residents undergo examinations to determine what barriers they face, if any, to joining the work force and gaining the ability to house, feed, and clothe themselves. Those who have substance-abuse problems must join rehabilitation programs; all who can benefit receive job counseling and education. Since there is no longer a minimum wage, many formerly homeless have been able to begin working at very low wages and at relatively low risk to employers; money thus earned decreases the amount they receive from the negative income tax but raises their total income. Once capable of making the transition, working residents are transitioned to mainstream rental housing. Of course many can not do this, but they were homeless in the first place because they had serious problems.

More about 2025

2009-04-11T21:29:00.000-07:00

In 2025, crime rates are low, partly because when people choose to injure themselves by abusing drugs, we no longer call that a crime. Spending for prisons is also less and the profit from drug sales is way down, meaning that selling (formerly illegal) drugs is a much less attractive business area. Fortunately, for people who want to find real jobs, removal of the minimum wage has allowed just about anyone to find a legal job and enter the work force young. The on-the-job training they receive now launches them into legitimate careers by teaching them behaviors that can only be learned from real jobs. Studies show that most move up the pay scale relatively quickly because if their present employers don’t offer them raises, there are other businesses looking for eager young workers with experience who will. Our kids are getting hooked on drugs a lot less for a couple of reasons: first, there are fewer sellers since the money is no longer in it and since law enforcement now focuses on sales to minors; second, since it is no longer illegal, drug abuse is no longer cool, just stupid; and third, they don’t have time for drugs now since they’re working.

Another crime that is now under control is so-called identity theft. Use of Real ID cards and strict security measures surrounding card use and access to financial accounts, most importantly Life-Savings Accounts, have reduced the ability of criminals to conceal their own identities and to steal electronically.

Almost all US citizens can now reach financial independence and provide for their own retirements. However, some citizens, through lack of foresight, poor planning, or misfortune beyond their control, are unable to provide for themselves and do not have family members willing to help. In these cases, since the Federal Government now takes much less of your money, state and local governments are able to raise the funds needed to provide welfare much closer to home and to the real problems. Unlike Social Security, which helped everyone regardless of need; targeted aid is far less costly.

More about 2025

2009-04-07T10:33:00.000-07:00

In 2025, with the transition out of Social Security and Medicare well under way, we are almost past the government protection racket. We now have Life Savings Accounts which allow us to invest before-tax income in a variety of assets and equities. Those include stocks and bonds, money-market, bond and stock funds, precious metals, art treasures, and real estate. The introduction of diversity has met three goals: first, it allows us to spread our investment risk across assets whose values do not normally move in concert; second, it lets us to keep some of our assets close at hand for immediate use; and third, it enables us to invest our own money to increase our equity in what is most important to us. The purposes for which we use our Life Savings are as varied as our lives. They include education (ours and our children’s), home purchase (encouraging home ownership through equity, rather than debt), health insurance, starting a new business, and retirement. This is not necessarily restrictive. In an emergency, we can borrow from our Life Savings with the option of restoring the funds later (to avoid the taxes). The government also benefits since government bonds are eligible to be held in Life Savings Accounts.

Contribution to a Life Savings Account is not mandatory but it is advisable. Most people leave their money in the accounts knowing that their tax rates will be lower following retirement. Education has played a crucial role in this matter; we have learned the importance of saving, the power of compound interest, the value of equity in a home or a business, and the importance of starting early and staying the course. And, we have reassured ourselves how much more efficient it is to use our own money in our own best interest. In 2025, we no longer hear about a government safety net, which was nothing more than a one-size-fits-all government solution to help everyone, whether they needed it or not. In 2009, that so-called safety net was so far down that it was already on the ground.

to be continued...

Chapter 12: On the home front in 2025

2009-04-06T08:01:00.000-07:00

Suppose that a miracle happens, that Americans everywhere embrace the goals, strategies and actions implied by an equity-based economy. What kind of a country would this be in 2025? We all understand that natural disasters, famine, plagues, and conflicts will have an influence on our lives. We also understand that other countries, as they learn more about democracy and freedom, can become strong competitors. However, a strong USA will be able to take all in stride if the miracle really does happen.

With the federal government claiming a smaller percentage of private sector money, private-sector job growth is strong and sustainable. The work force is now more responsive to the demands of the market and to customers than to government regulations and entitlements. A flat tax allows you to make business and personal-investment decisions based on fundamental economic principles rather than on avoiding taxes; your various equities continue to grow. Elimination of the corporate income tax has encouraged market-oriented business planning and investment in research and development.

Removal of the minimum wage has enabled you to hire whom you want at a mutually-agreeable wage based on value to your company. The elimination of government monopolies and subsidies in the areas of health care and retirement allows you to pay your employees more and allows them to keep more of what they earn. It allows them to purchase the health insurance that is right for them and then to change jobs freely without the fear of losing their insurance. A few older people, the last of the privileged from the 20th century, still receive Social Security and Medicare payments from the taxes of working people. Most in this age group have converted to Life-Savings Accounts, having cashed in their government promises in these areas early. In addition, many of them are still working since a strengthened medical community has had a rejuvenating effect on all of us; the average 65-year old is still young and vigorous.

The great debate on Social Security is over. This battle of wits, between unarmed opponents, featured two themes: private retirement accounts; and saving Social Security. Experts (including elected representatives) against private accounts told us that “stocks were risky” (a credit crisis, created in part by an overheated and overwhelmed mortgage market, has proven that stocks, of even the best companies, are indeed risky); their implied corollary was that your government stood ready to handle your money for you and to protect you from nasty, risky stocks. Fortunately, well-informed voters decided that they could trust themselves with their own money; the “pyramid scheme” that was Social Security was put out of its misery.
Most people under the age of 40 wanted to end Social Security; many older people did not.

Transitioning out of Social Security turned out to be a budgeting matter, much like individuals getting out from under massive credit-card debt. First, we cut up the credit cards; then we decided how to pay off the current debt. The Social-Security debt amounted to all the money we pay retired folks who stayed in the system plus the money we paid back to those who left. The second part was challenging because those paybacks amounted to a balloon payment. Making this payment required the federal government to assume a long-term indebtedness (not unlike Social Security itself). The servicing of this debt plus the payments to retirees still in the system will, for about 20 more years, be a part of the federal budget; yes, it does take time to climb out of deep indebtedness. Today, there are two major differences: first, the money is raised through the general tax fund – the rate on the new flat tax was calculated to take this into account – and the tax flows from every dollar earned (and reported), rather than just the first $87,900 of individual income as it did in 2009; second, the pain we are going through now will end Social Security and take that monkey off the backs of the young.

to be continued...

Solution 4: Dramatically reduce defense spending

2009-03-31T20:49:00.000-07:00

I will stipulate that national defense is a legitimate role of our federal government, but I claim that the job could be done much better and much cheaper. The following savings measures should be considered.

“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.” Dwight D. Eisenhower

Measure 1, remove Congress from the weapons-procurement and base-funding business. Our Congress comprises representatives from the many states and districts throughout the country. Each is sent to Washington to defend the interests of the folks back home, farmers and defense contractors alike. The expression fox in the hen-house was never more applicable than when applied to the role of Congress in deciding which military components and systems to buy. Nothing in the Constitution assigns this role to the Congress. The legislature should work with the executive branch and the intelligence communities to assess the threats to our national security and then to decide how much money to spend to address those threats. The responsibility should then fall to the Department of Defense and the Intelligence Agencies to procure the equipment and operate the training facilities, within Congressional budget guidelines, necessary to execute defense policy.

“Don't interfere with anything in the Constitution. That must be maintained, for it is the only safeguard of our liberties.” Abraham Lincoln

Measure 2, reward savings rather than overruns. Funding policies which penalize under-spending by acquisition programs violate sensibility and lead to needless over-spending; federal programs which deliver goods and services on schedule and under budget should be rewarded. Those which overrun their budgets should be cancelled.

Measure 3, look to our allies for development savings. There is an understandable inclination to spend taxpayer money at home. However, some of the systems our defense department needs, but does not have, are available from our allies. While it makes sense to keep manufacturing jobs at home, significant development time, money, and risk could be saved by simply licensing technology from our allies – just as they do from us. Not only would this save taxpayer money, it would develop equity in our allies.

Measure 4, clarify government and contractor roles and responsibilities. Ideally, government issues requirements, private contractors build systems to meet those requirements, and government test and accepts the products which perform as promised. Great amounts of money could be saved if the government used the Internet model of requirements, specifying interfaces, functionality, and performance, and allowing industry free reign to meet those requirements. The savings will come when the requirements are stable – changing primarily to meet new threats – and industry is free to compete to continually improve the evolutionary system.

Measure 5, combine the armed services. The word “joint” has been used for years now to describe procurement programs which cross armed-service boundaries. Unfortunately, these programs still command a minority of the procurement budget; the result is that the majority of military systems are incompatible with each other. Military tradition, which sets up more competition than cooperation among the armed services, costs the taxpayer in redundant and overlapping functions; in addition to our Navy, Marine Corps, Air Force, and Army, we have a Marine Corps air force, a Navy air force, Navy special forces, Army special forces, a Coast Guard separate from the Navy, separate service academies, separate procurement systems, etc. Not only would combining the armed services save the American taxpayer money, it would result in more efficient communication and command and control, sensor, and weapon systems.

“I hope our wisdom will grow with our power, and teach us, that the less we use our power the greater it will be.” Thomas Jefferson

Solution 3: Target foreign aid to business development

2009-03-30T08:03:00.000-07:00

With our country drowning in debt, it may seem an odd time to bring up this subject, but just in case we do move to an equity-based economy, the topic of foreign aid may once again become important. Our country gains its prosperity through the development of equity by its citizens, under the protection of the government. That should be a clue for how to structure foreign aid. By agreement with the government of the target country, our loans and grants should be offered to individuals and be approved on the same basis that we award business loans in our own country, with the promise that they be repaid. A high probability of repayment can only come through the application of sound business practices, starting with a business plan; the exercise of such practices is the key to building a strong economy. Muhammad Yunus, Grameen Bank founder, won a Nobel Prize in economics for proving the efficacy of this principle. By investing in individual citizens in the private economy, we strengthen the country.

But, aren’t some countries so poor that they will never catch up? Don’t we need to invest in their infrastructure? Never is a long time. The infrastructure that we may offer, that is right for us, may or may not be helpful to the growth of a new economy. If for example, loans are offered to farmers to purchase seeds and fertilizers and to institute crop rotation, the new produce may go first to local towns and villages. The infrastructure under discussion may simply amount to a market place or two and a road cleared and maintained by local villagers. The roads may then be built as private ventures, whose initial and recurring costs are paid by use taxes (toll booths have been a feature of American roads for decades). The enhanced productivity of the farm may yield the profits necessary to finance a large part of the venture. The point here is that, once the fledgling private sector has life, private citizens can decide on what infrastructure investments make sense; they can even apply for more loans.

Foreign aid can never be a panacea. It takes time to build a vibrant economy in a poverty-stricken region. Current policies of financing governments in place can actually be counter-productive, by strengthening the governments rather than the private businesses of the governed. This can have the perverse effect of institutionalizing statist governments and policies.

Solution 2: Promote an immigrant-friendly policy including “open” borders

2009-03-25T07:55:00.000-07:00

Our immigrant-friendly policy includes a number of items that have been proposed in the past. We view these items from the unified perspective that the immigration that built this country continues to make us strong; and that new immigration will make us stronger. Open borders effectively means that we allow just about anyone from either side of the border to cross. It also means that as we accept immigrants, people who want to work in the USA, we feel free to cross the border in the other direction to build homes, businesses, and lives in peace and freedom.

The following items comprise the policy.

Item 1, end the war on drugs. This action, discussed in our domestic section, would eliminate the bulk of drug smuggling which would in turn discourage much of the high-profile criminal element from entering the country. It would also benefit our neighbor to the south in their dangerous, bloody battle to bring drug gangs under control.

Item 2, grant amnesty and legal residence to those who have a clear means of support, who have immediate relatives who are citizens, or who can obtain sponsorship from a citizen. The cost of doing this is the admission that, while it is illegal to immigrate to the United States without US Government approval, we have failed to enforce our own law and that the result of this failure is that more than ten million lives now hang in the balance. The benefit of doing this is that the ten million, their offspring – and admittedly more who have yet to arrive – stand an improved chance of becoming citizens, full partners in our country.

Item 3, reinstate the Guest-Worker Program. This program, which allows alien workers into the country to work for limited periods, benefits both worker and employer. The worker benefits from safer conditions, from an efficient process which matches workers to jobs, and from the right to return to his country of origin when not working. The employer benefits from a legal program supplying willing workers at competitive wages. The American public benefits from products – for example, fruits and vegetables – produced and sold at reasonable prices. The underlying assumption here is that the guest workers are willing to work for less than citizens. If this were not true, there would be no demand for guest workers. Citizenship could continue to be granted to aliens based on the length of time they have been here legally. Other conditions could be imposed on citizenship, such as mastery of English, employment, etc.

Item 4, adopt Real-ID standards, recently proposed by congress, for drivers’ licenses. These standards address side problems of unlicensed, uninsured drivers and aliens here without any means of identification. The idea of a national identity card for all citizens and residents was considered and rejected. Libertarians have been very persuasive on this point: the risk of creating a central database and granting access to the federal government outweighs the benefits of being able to make positive identifications and know who is in the country. No government is immune to malevolent actions – the record of our own government is mixed – and easy access to the records of all citizens poses significant risk.

Item 5, continue to support the Maquiladores, those work environments run by our companies, but built and employing people south of the border. While protecting ourselves against criminals and terrorists is important, the one-way flow of immigrants into the USA can only be changed by a new dynamic. This is true, because as axiom 4B tells us, “unobstructed, labor will move to capital and capital to labor;” at present, we have the capital, they have the labor (although as our recession deepens, we have less and less capital and there are fewer and fewer new immigrants, legal or illegal). And since the border is long and people are persistent, the struggle against this fundamental axiom has been a losing one.

Item 6, protect American interests in Mexico. At present, the protection of American citizens and their property in Mexico is unpredictable at best. One way to stem the tide of Mexican immigrants is through a counter tide of American citizens and business heading south, buying property, building homes and businesses, and making money. The stimulus to the Mexican economy would be powerful and the jobs thus created would entice many of those, now desperate to flee to the USA, to stay in Mexico to find opportunities to work.

Make no mistake; making this policy work would be non-trivial. A safe, corruption-free environment is a necessary condition to attract a critical mass of outside investment and business into Mexico. And, let’s be honest, much of southwestern USA once belonged to Mexico, so the idea of open borders, while it may shock some Americans, scares Mexicans far more; how much more territory are they likely to lose? However, the long-term best interests of both countries are served by open borders, even if it means the loss of some Mexican autonomy in exchange for an increase in economic prosperity.

The CBA as a tool of domestic policy: thoughts on toll roads

2009-03-22T13:04:00.000-07:00

Should we have more toll roads? I say “yes.” Using federal tax money to pay for our nation’s highways might be appealing to some, but it is both inefficient and unfair. It does not directly account for which roads carry the most or the most important traffic, a simple violation of Axiom 1C, “all government spending is a tax on the wealth of a nation.” Tax-payer financing of highways subsidizes the use of trucks to move products, a violation of Axiom 3A, “to obtain more of something, subsidize it.” A CBA exposes the fact that there are winners and losers even in such non-controversial areas as interstate highways, commonly placed in the infrastructure category. The cost of the subsidy to truckers and to automobile drivers is borne by all, including their competitors, the railroad and airline industries. It should also be noted that by subsidizing truck and automobile traffic, we also increase the demand for energy.

Toll roads make good economic sense because the ultimate costs are paid by the users; thus, toll roads channel the money to the roads which are most in demand. Toll-road advocacy is not equivalent to advocating that roads and highways be built anywhere and everywhere. Government still retains a regulatory function.

The CBA as a tool of domestic policy: thoughts on abortion

2009-03-19T08:51:00.000-07:00

Should abortion be re-criminalized? This is a question that has divided partisans into two basic groups for a long time: so-called pro-life advocates claim quite simply that abortion is murder and must be stopped; so-called pro-choice advocates claim that prior to birth, a fetus is part of a woman’s body and that the choice about whether or not to perform an abortion should be made by the woman and her physician. Each group claims to have a strong case, but each position carries a cost. The pro-life position would re-criminalize abortion and again drive it under ground with these costs: it would again become a dangerous, unregulated procedure for those of limited means; it would again cause women who can afford the price to go to other countries for safe, legal operations; and it would, in many cases, leave us with unwanted children.

“No one is pro-abortion.” Barack Obama

These were effectively the options and results prior to the Roe versus Wade Supreme-Court decision (22 January 1973). The pro-choice position carries the cost that it masks the trauma that abortion brings; women may be led to feel initially that abortion holds equal value with carrying a baby until normal birth, only to be left with very strong physical and emotional reactions. The two-party CBA is useful in that, if we consider the costs of each position, and consider a solution that will benefit each, the advantages of a neutral policy, adoption, become very clear.

Conclusion: by moving away from polar positions to a shared position of adoption advocacy, the benefits of fewer abortions and fewer unwanted babies and the very significant benefit of keeping government out of this personal area can be realized.

“I have no doubt that every new example will succeed, as every past one has done, in showing that religion and Government will both exist in greater purity, the less they are mixed together.” James Madison

The CBA as a tool of domestic policy: looking at energy

2009-03-17T20:22:00.000-07:00

A CBA can help us to gain perspective on difficult domestic issues. For example, should the country have a federal energy policy? In 2008, as gasoline prices moved smartly to $4 per gallon, cries rang out across the land, as they often do, that the USA needed to be "energy independent," or at least independent of middle-eastern oil producers. Various proposals were floated during this period of hysteria including 1) raising the gasoline tax (to promote even more conservation of fuel), 2) lowering the gasoline tax, to give motorists a break, 3) increasing taxes on domestic oil companies, because they made more money than usual, 4) investing taxpayer money in alternative forms of energy, etc.

These actions violate Principle 2, “do not intervene in the free market;” which is, of course, a red flag. Our federal government routinely regularly devises energy policies to open protected areas or to subsidize the development of alternative energy sources with little noticeable effect on the supply of energy. Note also that the tax, an obvious cost of this policy, would have to go somewhere. It might make sense to have the states which collect the taxes apply them to state road and highway maintenance and safety, but it’s not at all clear that the federal government needs to raise funds this way.

Conclusion: if reducing our dependence on fossil fuels is an overriding concern, the government should probably stay out of the process. If prices are too high, freedom and the law of supply and demand, rather than any government, will restore the balance. If there is a real need for alternative sources of energy, the market will signal this by high energy prices which will make those sources economically viable. Government should stay out of the process (the market) and let traditional energy providers add to their existing infrastructures or team with new-source providers to supply energy using proven techniques.

Cost-Benefit Analysis (CBA) Summary

2009-03-15T16:17:00.000-07:00

A Cost-Benefit Analysis (CBA) encourages decision makers, and those they serve, to view decisions objectively, from an economic perspective. It frees decision makers from the shackles of historical limitations (such as a desire to exact revenge for prior misdeeds or to atone for past mistakes) and partisan political interests. It makes decision criteria visible to all concerned, encouraging more responsible decisions and greater efforts to gather and validate information on which costs and benefits are predicted. The CBA, a formalization of that philosophy, can serve as a record for decision makers and make explicit the facts of each case and the decision-making process. The CBA is subject to continual evolution and improvement through use. To illustrate, as the list of potential costs to be included in an CBA grows and as the experience in estimating those costs accumulates, the probability that important points will be inadvertently omitted from an analysis or misunderstood diminishes and the probability that we will make better decisions over time increases.

Estimating costs for complex military operations is non-trivial; however, this is an argument for rather than against the use of CBAs. The CBA will spawn new tools to estimate costs, and in place of the merely qualitative arguments used in these examples, one would expect to see quantitative cost and benefit predictions. Uncertainty factors could be applied to predictions; high uncertainty would reflect unavailable or unreliable information. Scaling could be added to show how decision timing would affect costs and benefits.

“It had all the earmarks of a CIA operation; the bomb killed everybody in the room except the intended target!” William F. Buckley, Jr.

Some may argue that basing foreign-policy decisions on costs and benefits is immoral. The counter argument is that deciding to do the right thing when the cost-benefit ratio is high indicates that the decision is flawed, that the timing is poor, or that it is not the right thing at all. The CBA would improve decision-maker accountability and performance and public understanding; that would be a moral outcome.

Cost Benefit Analysis - Example 3: Closing US Military Bases

2009-03-12T09:34:00.000-07:00

The U.S. has over 700 military bases in 120 countries around the world. Chalmers Johnson, author of The Sorrows of Empire: Militarism, Secrecy, and the End of the Republic and NEMESIS: The Last Days of the American Republic, says that, "As distinct from other peoples, most Americans do not recognize -- or do not want to recognize -- that the United States dominates the world through its military power. Due to government secrecy, our citizens are often ignorant of the fact that our garrisons encircle the planet.”

While we can debate the “dominate the world” or “our citizens are often ignorant” themes of the above paragraph, it is a fact that the USA has established military bases around the world at US-taxpayer expense. World War II and the Cold War are over: the need for American bases in Japan and Germany is highly suspect; American troops in Saudi Arabia were the pretext for Al Qaida to launch the attack of 11 September 2001 in supposed retaliation for our violation of land holy to Islam; and rather than give us the means to keep the peace, bases in the Middle East served as launch points to start a lengthy shooting war in Iraq.

Our fourth principle advises us to “be consistent, at home and abroad.” Do we believe that armed Italian or Jordanian troops should be stationed in the USA? If we believed it before, do we still believe – after summarily rejecting the Kyoto treaty to limit greenhouse gases, after our “pre-emptive” invasion of Iraq, after our federal government transformed a budget surplus into an enormous deficit, after falling deep into debt to such countries as China, and during our subprime and related economic crises that threaten to collapse world economies – that we are morally superior to these and dozens of other countries, such that it is fine for us to station armed soldiers and sailors in their countries, but it is not fine for them to do the same in ours?
I believe that we have proven to ourselves that the use of military force is a very blunt instrument in the service of foreign policy. It may at times win friends – during World War II we did come, belatedly, to the aid of friendly countries under siege from aggressive dictatorships – but in most cases military action alienates friends and creates life-long enemies. You have read in this book that the key to transforming the country is to transform ourselves. Likewise, I believe that the key to transforming the world – making it a safer, freer place is to first transform our country to serve as a model. Just as you can be of little help to your country if you are weak, so our country cannot offer credible leadership in the world as long as our own house is in disarray.

“It is part of the general pattern of misguided policy that our country is now geared to an arms economy which was bred in an artificially induced psychosis of war hysteria and nurtured upon an incessant propaganda of fear.” Douglas MacArthur

The subject at hand is the closure of US military bases; this includes the closure of the massive bases developed, and under development, in Iraq. Let’s look at one more CBA to judge what might be gained and lost by doing this.

US Costs
The primary costs to the US would come if any or all of a series of risks are realized. The first is the risk of being perceived as the loser in the Global War on Terror. Following the withdrawal of US forces from around the world, there is a risk that insurgencies would spring up to bring violence and insecurity to countries we have “abandoned.” If we appeared to be in full retreat, there is a risk that terrorists might be emboldened to take their fight across borders to other countries; one might argue, of course, that this is already happening as Hezbollah and Hamas disrupt Lebanon and Gaza and both, backed by Iran, challenge Israel. As those events unfold, US morale and confidence in our abilities to influence international events might flag.

It took years for US diplomats and the US military to recover from our withdrawal from Vietnam and the subsequent fall of that country to the Communists. If the war in Iraq is subsequently lost and democracy fails, there is a risk of a similar loss of confidence. There would be further confusion at home about the original purpose of the war and its exorbitant costs; this might paralyze our government and make it very difficult to address the threat from terrorism at home. There are also short-term costs to repatriation of troops and equipment to the USA. And once repatriated, if those troops are suddenly needed to respond to a request from a friendly nation to help them repel attacks, the redeployment of troops would be expensive.

US Benefits
On the positive side, a withdrawal by American forces from bases abroad would dramatically reduce long-term costs for personnel, materiel, and property, now benefitting other countries. A related benefit is that repatriated troops could either be deployed where “really” needed or could be part of a larger effort to draw down the number of active-duty personnel at considerable savings to the taxpayer. A related benefit would be the removal of roadblocks to cooperation on many issues with other countries, both allies and current adversaries. For example, most European countries, particularly key allies France and Germany, did not support our invasion or occupation of Iraq. Likewise, a diminished US military presence in the region would lessen Arab antagonism toward the US; this might, for some, remove one motivation to join radical Islamic movements and thereby reduce the terrorist threat to Americans.

At home, cutting expenditures for operations would allow the US military to refocus on bringing the US military into the twenty-first century by acquiring less costly, more-efficient evolutionary (Internet-like) systems. Reduced costs for war and base operations would also allow the government to reduce spending to aid a desperate domestic economy. One benefit, difficult to quantify, but priceless nonetheless, is the sense of clarity of purpose and harmony of purpose and action. If we say we are not an imperialist country, we can better prove it if American military forces are not scattered all over the world. If we say our purpose is to preserve rather than destroy equity, we can better prove it by refraining from using “preemptive” violence. And if we say that we are reducing debt, we can better prove it by reducing government spending and by doing necessary spending at home rather than abroad.

Host Country Costs
Let’s look at the most dramatic case, the withdrawal of American forces from Iraq. When that finally happens, it will put the burden for Iraqi security on the shoulders of those Iraqis who support a democratic state. Failure to meet that challenge could take Iraq back to the dark days of dictatorship or could lead to a fragmentation of the country along ethnic lines; a mitigating factor is that Iraqi forces loyal to the elected government have already assumed much of the security burden. The withdrawal of American forces will also leave Iraq more vulnerable to foreign influence; fortunately, at present, it appears that the foreign threat would take the form of individual fighters rather than modern armies with tanks and planes. The withdrawal of US forces will also slow the training of Iraqi forces. However, if invited, the government of the United States would be free to choose whether or not to send advisors, to be paid by the government of Iraq, to further train the Iraqi Army.

Host Country Benefits
The withdrawal of US forces from other countries will remove a commonly offered and rarely challenged motive for insurgencies, to resist US imperialism. In the case of Iraq for example, the advantage to the peaceful citizenry of Iraq is that removal of that motive would give the democratically-elected government the moral high ground and the ability to cast the remaining insurgents as criminals. This would allow even the most anti-American Iraqi to come to the aid of his government and his country.

Withdrawal of American forces from around the world will have the “Darwinian” effect of testing whether the governments of the respective countries are fit to survive without the real or perceived outside influence of the USA. This is generally healthy in the long run – our interventions in the political processes of other countries have yielded very mixed outcomes. In the case of Germany and Japan, withdrawal of our troops and closure of American military bases will finally restore a long-overdue equality to our diplomatic relationships.

Synopsis
Because this analysis portrays a future series of events, costs and benefits are speculative. Nevertheless, the analysis helps us to classify what can happen and what is likely to result. In this particular case, it appears that tangible benefits would accrue to both sides. Based only on this analysis, it does appear that an orderly US withdrawal from and closure of US bases would be beneficial; one reason for this conclusion is that the status quo is very costly, especially to the USA. Restoring a sense of equality to our relationships with other countries does not necessarily mean a loss of American influence in the world. It just means that such influence will have to come through leadership resulting from good economic and diplomatic behavior rather than through violence or the threat of violence.

Cost Benefit Analysis - Example 2: 2003 Invasion of Iraq two-party CBA

2009-03-11T08:24:00.000-07:00

A two-party CBA, where the two parties are in an adversarial relationship, accounts for the costs and benefits of each. The two parties in this CBA are the USA (and by extension, its major ally, the United Kingdom) and the people of Iraq. We note that it is 2003, that the USA has been seriously limiting Iraqi military options for 12 years through military over-flights, through denying the Iraqi military access to their own air space, and through an economic embargo. Having refused help to Shiite freedom fighters in 1991 during internal uprisings against Saddam Hussein, the USA watched Saddam’s Republican Guard overpower and slaughter the opposition in bloody reprisals. According to officials from the USA and the UK, Saddam is again active in developing weapons of mass destruction. In his 2002 State of the Union address, President Bush labels Iraq part of an “Axis of Evil” (with Iran and North Korea) because of its supposed weapons development program. The USA succeeds in obtaining a UN resolution to reintroduce inspectors into Iraq.

However, even (one assumes) with intelligence cues from the USA, UN inspectors on the ground in Iraq cannot locate weapons of mass destruction or their production facilities. The USA decides to pursue a second UN resolution declaring that Iraq must turn in the alleged weapons by a certain date. Failing to gain support for the resolution, the USA turns its attention to planning war. Unlike in 1991, support is thin; only the UK contributes significant troop support to the US effort; even Turkey, a staunch ally, is opposed. France proposes hiring more inspectors and giving them more time, arguing that war should be a last resort. Germany opposes invasion for any reason. US over-flight capability would appear to curtail any immediate threats.

Constraint
One constraint, generally self-imposed by democratic governments, is evident: a democratic country does not invade another country preemptively, without solid proof of a direct, immediate threat. Time will reveal whether this constraint will be ignored thereby setting a dubious precedent for other strong, self-proclaimed moral societies to follow.

“If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy.” James Madison

Costs to USA
Costs are predicted to be high, because we will be the primary financiers (the predictions prove to be optimistic): a force of about 250,000 is foreseen to support US military operations (depending how one counts, this prediction is a little high, however, unlike 1991, the USA will pay full freight and stay much longer – and it will become clear that the force was actually far too small to secure the country following the initial success); the estimate of combat-related deaths is in the hundreds (an over-optimistic prediction when we combine our actions to defeat the uniformed Iraqi army and to engage resistance fighters in an aftermath far more violent than envisioned); extensive health problems from chemical or biological attacks are feared (this proves to be pessimistic); family separations and job and work-time loss are again predicted, as in 1991 (the differences are fewer people for longer durations this time and the unexpected call to active duty of reservists, members of the National Guard, and some who had served full tours and had separated or retired from the armed forces); oil fires are anticipated (this threat does not materialize until later, but the infrastructure of Iraq suffers extensive damage from bombing and from vandalism following the fall of Saddam Hussein); international ill will, resulting from unanticipated US arrogance and lack of diplomacy at the UN, in the press, and abroad, raises short and long-term costs for the war.

“War is an instrument entirely inefficient toward redressing wrong; and multiplies, instead of indemnifying losses.” Thomas Jefferson

Unpredicted costs include the persistent casualties (more than 4000 American combat deaths as of May 2008, many more severely wounded, and still counting), the high cost of military operations requiring congressional appropriations on top of already high federal spending, the decision to call reserve and National Guard forces to active duty in light of the difficulty of meeting recruiting goals and troop-strength commitments world-wide (owing to the tenuous situation in Iraq), the lowering of morale from second and third tours of service – and the extension of those tours from 12 to 15 months – in Iraq for regular forces, and the delay and weakening of the so-called military transformation in the USA because of funding shortfalls.

Benefits to the USA
It appears that benefits of the operation to the USA may have been oversold: a haven for Al Qaida will be destroyed (no credible evidence was presented that Iraq or Iraqis had links to Al Qaida in 2003); and Iraqi weapons of mass destruction will be destroyed (no evidence was uncovered to suggest that Iraq had such weapons at the time of the invasion).

Costs to Iraq
War always exacts a heavy toll from any country that plays host to invading forces: casualties among the Iraqi army and the Iraqi population were high; damage to and destruction of buildings, monuments, and infrastructure resulted in personal property loss and economic instability. The extensive crime and vandalism following the invasion were not predicted. Moreover, the stubborn and violent aftermath, pitting a persistent, deadly insurgency against an unprepared populace attempting to put their country back together cast sadness, fear and desperation over the country, created a large population of refugees, and placed the duration of the struggle, and indeed the outcome, in doubt. A “surge” in American forces and new tactics of deployment reversed the momentum of the struggle in 2007-2008; surges, of course, are temporary.

Benefits to Iraq
The removal of Saddam Hussein from power and the elections of January 2005 have the ultimate potential to offer increased freedom to the Iraqi people. The challenging business of establishing and maintaining a constitution, a representative government, and the basic rights and responsibilities that we associate with a free society, has begun. In a country of diverse ethnicities and interests and no democratic tradition, this is likely to be a lengthy process, made that much longer by the challenge to maintain order in the face of a diminished but still-present resistance.

Synopsis
The USA was in such a rush to go to war that time was thought to be an enemy; long-term inspections and marshalling the support of internal forces to overthrow the Baathists do not appear to have been seriously considered. Failures to allow time to prove the presence or absence of an immediate threat, to address the compromises requested by our allies, or even to marshal sufficient force to finish the war in a position to win the peace, were prologue to high costs to the USA. The long-term difficulties and costs of rebuilding Iraq and its government were not well understood. Long-term occupation of a country whose economy has been severely degraded, whose army and security forces have been disbanded, and whose people include many who are hostile to outsiders (even those who have not invaded them), can be demoralizing. As is now well known, infrastructure damage, impatience and ill will from many locals, and lack of security resulting from a failure to occupy and control the country quickly and completely, led to a continuation of low-level hostilities and a slow and costly reconstruction.

“You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.” Abraham Lincoln

The major benefit of the war is expected to fall to the Iraqi people. Assuming that the peace is ultimately won, Americans can take pride in ending Saddam Hussein’s reign in Iraq. However, in light of the high costs they have already paid for that pride, the young Americans that have done the fighting and bleeding are entitled to ask how we chose Iraq.

“I have known war as few men now living know it. It's very destructiveness on both friend and foe has rendered it useless as a means of settling international disputes.” Douglas MacArthur

Cost Benefit Analysis - Example 1: 1991 Invasion of Kuwait – a one-party CBA

2009-03-08T20:54:00.000-07:00

Consider first a one-party CBA to estimate costs and benefits, account for time, and account for constraints (cost limits, risk limits, laws, treaty obligations, etc.) for a single group or country. It is 1991. Iraq has invaded and intends to annex Kuwait. The USA fears that Iraq may invade Saudi Arabia as well. Kuwait has asked for help from the United Nations. The USA supported passage of United Nations Resolution 678 (29 November 1990) calling for Iraqi withdrawal from Kuwait, and has secured the support of Saudi Arabia (funding and basing) and other allies (basing and troop support). Iraq has already decided (although they may not have used a CBA) to ignore the UN resolution. Iraq is well armed and well entrenched and there appears to be no way to reverse the course of events other than through military force. Shall we, the USA, act to enforce the UN resolution? A one-party CBA is chosen to analyze the case for war because Iraq did not directly attack us; we are not under direct threat from Iraq and are therefore under no obligation to respond.

Constraint
UN Resolution 678 authorizes the use of force to implement UN Resolution 660 (2 August 1990) – calling for Iraq to “withdraw immediately and unconditionally all its forces” from Kuwait2 – but does not authorize changing the regime in Iraq. This will prove to be a key constraint.

Costs
Costs are predicted to be acceptable (this proves to be true): A US military force of more than 500,000 is foreseen, but the cost (to the USA) is predicted to be low since Saudi Arabia has agreed to finance most of the operation; casualties are estimated to be as high as 10,000 dead based on intelligence reports of Iraqi capability (fortunately, although each death is tragic, casualties are much lower); health problems from chemical or biological attacks are feared (many serious health problems do occur, but many of these are apparently caused by the use of unproven vaccines, intended to mitigate the effectiveness of attacks, or insect repellents); extensive reserve recalls will cause family separations and job and work-time loss on the home front (true); and, the unanticipated cost of putting out oil fires will be borne by Kuwait.

Benefits
Benefits are considerable: liberating Kuwait will put us in the position of freeing that country from Iraqi domination and restoring and assuring the unrestricted flow of oil to the west (although realized, this benefit is compromised by the decline of Iraqi oil production); securing the UN resolution and establishing multiple bi-lateral agreements will assure the USA broad international support, minimize international disagreements, and dramatically reduce financial burdens; a shooting war will reduce Iraqi capacity to make war and to produce weapons of mass destruction (this prediction is accurate); and successful use of military force will allow establishment of a long-term coalition presence to limit future military threats from Iraq in the region.

One benefit will not be realized: Saddam Hussein will not be removed from power because the coalition, led by the USA, will observe the UN resolution constraint. Consequently, the Iraqi people will continue to suffer a lack of freedom. This indicates one weakness in the single-party CBA: it may overlook a benefit to an adversary or, more accurately, to a country that might be turned (back) into an ally.

Synopsis
While the option to refrain from invading was available, the coalition chose to invade because the cost-benefit ratio appeared favorable. The coalition invaded and removed the Iraqi army from Kuwait; Saddam Hussein remained in power in Iraq and his army retained enough equipment to repress all opposition. The operation was declared a success. Some coalition forces were left in place to enforce no-fly zones.

Costs to soldiers wounded or killed in combat, and to their families, are always too high. However, the USA buried its dead, grieved, and then recovered and celebrated its success. The US Government had invested the time to secure the appropriate UN resolutions, form a coalition, put the necessary forces, troops and equipment on the ground, and bomb appropriate targets; that those decisions were largely influenced by Margaret Thatcher, Prime Minister of the United Kingdom, does not diminish them. The decisions to engage the international community and lead a broad coalition into war were cost-effective. That we were not the major bill payer meant that the war did no visible damage to the US economy. The stated goals, to liberate Kuwait and protect regional oil production from Iraqi influence, were achieved. The unrealized benefit – freedom for the Iraqi people – reflects the political climate of the times; support to remove the Baath party from power in Iraq might have been too costly, taken too long to secure, been less than universal, and endangered the alliance. One lesson learned from this example is that a two-party CBA may have merit.

Foreign policy solution 1: Use cost to measure the impact of foreign-policy decisions (continued)

2009-03-04T21:13:00.000-08:00

Leaders of insurgencies appear to understand that they can only meet their goals over time, if at all, since their military forces are generally inferior. French, British, Israeli, American, and Russian experiences with the FLN, the Irish Republican Army, Hamas, the Viet Cong and Al Quaida, and Chechnya respectively teach us that struggles with insurgencies can be long-lasting. Cost will always be a critical measure of progress and success over time in such struggles. Note: benefits can be defined as negative costs, as raised costs to the adversary – a useful concept for a long-term struggle – or as rewards, e.g., greater security or more freedom. When costs clearly exceed benefits, a re-evaluation of policy is in order.

Decision makers in foreign and military policy can learn from those whose mission is to safeguard the environment. As we know, building a dam, logging a forest, clearing land for agriculture or housing, or constructing a power plant have long-term impacts on quality of life. Before beginning any such activity in much of the USA, developers file an environmental impact statement, predicting long-term effects on flora and fauna, water and air quality, geological stability, access, traffic, noise, and appearance of the site. Regardless of political persuasion, virtually every citizen is an environmentalist when protecting his own home and community. Therefore, most citizens regard environmental impact statements favorably, even while some developers may see them as red tape. Similarly, in order to clarify the full impact of proposed actions on the citizenry and others, we must demand that our representatives support every foreign-policy decision with a cost-benefit analysis (CBA). We must hold our representatives accountable for costly long-term decisions; however without the proper tools it is unlikely that our decision-making ability can improve regardless of who holds public office.

The CBA would define and predict short and long-term costs and benefits. Costs are defined here as losses of equity and more specifically as injuries to people, expenditures of money, loss of property or land, loss of security or freedom, and, more abstractly, loss of respect, trust, or political capital. Likewise, increases in trade and investment, improved security, increases in freedom, and improved international standing represent benefits. Conversely, in conflict situations, we may count our costs as benefits to our adversary and his costs as our benefits. While this approach may be useful to assess progress and plans related to long-term struggles, note that an adversary’s losses only represent gains for purposes of charting the struggle – they do not really increase our equity. With the aid of three simple examples, we can see how we might have used a CBA in the past and how we can make it useful in the future. The examples were chosen, to examine past, current, and potential future situations and to illustrate how the CBA can evolve through use.

“The most successful war seldom pays for its losses.” Thomas Jefferson

Foreign policy solution 1: Use cost to measure the impact of foreign-policy decisions

2009-03-03T19:40:00.000-08:00

Of course our invasion of Iraq, cited yesterday, is just a recent example of a costly decision by one country to invade another. Since war is so destructive of equity, it should be avoided whenever our lives and freedoms are not demonstrably, directly threatened. War provides a rich and tragic set of experiences that suggest that cost is not only a measure, but can also be a predictor, of success or failure in the event that war proves to be unavoidable.

In the US Civil War, the Union used superior wealth and production capacity and superior numbers to exhaust the Confederacy; during the Vietnam War (1955-1972) the USA put people on the ground and the Soviet Union sent weapons to the North (cost advantage USSR); when the Soviets invaded Afghanistan (1981), the USA sent Stinger missiles to the Afghans (cost advantage USA); the “Reagan buildup” of our military (1981-89) was costly, but favored the USA because the USSR tried and failed to keep up; the first US-led Gulf War (1991) had limited objectives (remove the Iraqi Army from Kuwait) but was financed by others; our 2001 invasion of Afghanistan leveraged (1) our anger and international outrage over the 11-September attacks on our country, (2) Northern Alliance anger over the assassination of Ahmed Shah Massoud by the Taliban a month earlier, and (3) payments to the Northern Alliance, to mobilize US, French, and Italian carrier-based aircraft, Northern-Alliance ground forces, and US special operations units, to mount an effective attack on the Taliban; and our 2003 invasion of Iraq removed Saddam Hussein from power and leveraged the will of American troops to fight and die for (Iraqi) freedom and the courage of Iraqi citizens to hold free elections. However, US taxpayers picked up the bill in Iraq and their check book is still open; the so-called explosions of joy, predicted in Washington, were over-shadowed by a long series of more conventional and deadly explosions. US taxpayers also picked up most of the bill in Afghanistan where, in our eagerness to invade Iraq, we celebrated as victory our success in just one battle of what has turned into a very long war.

Better cost predictions might have changed initial conditions and outcomes in some of the above situations. A country and its government rarely plan for a long war; rather, they begin with the idea that each operation (an attack on Fort Sumter, a bombing of Pearl Harbor, an invasion of Russia or Afghanistan, etc) will be an isolated event whose short-term benefits will outweigh long-term costs. In addition, since there are costs associated with gathering intelligence (enemy positions, strengths, readiness, intent, motivation, etc.), the real or apparent press of time may influence a government to make decisions with incomplete or ambiguous information.

Moreover, believing the wealth and power of their country to be unlimited, leaders of an empire may conclude that any operation is affordable. However, as the histories of the Mayan, Roman, Ottoman, British and Soviet empires teach us, resources are finite, dominance is temporal, and cost-benefit analyses make sense even for a self-proclaimed “super-power.” Moreover, the hidden but inevitable costs of an expanded domestic government infrastructure are rarely if ever taken into account.

“I hate war as only a soldier who has lived it can, only as one who has seen its brutality, its futility, its stupidity.” Dwight D. Eisenhower

Chapter 11: Foreign policy solutions

2009-03-02T20:26:00.000-08:00

It is clear that the complexity of the world and the urgency and multi-dimensional nature of foreign affairs make it difficult for our representatives to gauge the full impact of the policies they are called upon to shape. There is no discernable evidence that they have the tools necessary to organize the information affecting the decisions they need (or think they need) to make. Even when they are on the right track, decision-makers often find it difficult convey the rationale and expected impact of their decisions to others. Our decision makers need better processes. In international relations, particularly in decisions relating to the use of military force, they need a process allowing them to weigh and compare alternatives and to gain a clear understanding of short and long-term impacts. As in domestic affairs, economic principles can guide us; cost and its corollary, benefits, can be used to formulate such a process. Incidentally, partisan debate is generally quite useful for discovering the full range of costs and benefits associated with a decision. And while it has received close scrutiny recently, the area of intelligence is just a part of the puzzle.

The 2003 invasion of Iraq provides a case study characterized by controversy, complexity, and consequences, intended and otherwise. Whether or not one agrees with the decision to go to war and with our extended military presence in Iraq, the claim that events have unfolded as originally advertised by our decision makers is difficult to support. This important decision is likely to be questioned in the media and by the general public for some time. Even those who characterize the decision to invade Iraq in 2003 as “the right thing to do” may question the timing.

“When people speak to you about a preventive war, you tell them to go and fight it. After my experience, I have come to hate war.” Dwight D. Eisenhower

Chapter 10: Foreign policy goals

2009-03-01T20:56:00.000-08:00

Chapter 9 documented foreign-policy problems. In this chapter, we offer 5 goals to respond to those problems.

Goal 1. Protect the lives and property of our citizens at home

Certainly, this goal is a primary reason for the existence of the federal government. Our founding fathers recognized that providing for the common defense is a national issue.

Goal 2. Protect our citizens and our legitimate interests abroad

When we travel in another country, we depend on the hospitality and services of that country. When we establish businesses or buy property in another country, in compliance with their laws, we expect to be protected as the citizens of that country would be protected. Through strong relations with other governments, our own government can help.

Goal 3. Be a good shepherd of US taxpayer money

As an agent of the US taxpayer, we want our government to use any money abroad effectively, scrupulously, and morally and to be accountable for results and consequences.

Goal 4. Promote freedom and prosperity at home and abroad

Freedom and prosperity raise the quality of the lives of US citizens. We should promote this for other countries as well.

Goal 5. Be recognized as a force for good

This is a rather abstract goal that simply means, establish a good reputation abroad.

Dubious foreign policy 5: Defense budget distortions

2009-02-27T21:10:00.000-08:00

I wrote the paragraphs which follow three years ago. They seem as true today if you update the figures and substitute the new administrations focus on Afghanistan for the previous administrations focus on Iraq.

It costs the US Navy approximately $250,000 a day to maintain an aircraft carrier pier-side; once underway, the cost per day jumps to $2,500,000. These costs include the salaries of carrier-based sailors.

The US Department of Defense spent about $400 Billion, on the record, in Fiscal Year 2005 (1 October 2004 – 30 September 2005); that was approximately 1/6 of the total US Government budget. As it happens, one legitimate role of the US Government is to provide for the common defense. The problem is not that we defend ourselves through our federal government. Rather, the problem is that we spend far more than necessary and may, in the process, be decreasing rather than increasing our security. It is not my purpose to say what our defense posture or policy should be. However, a glance at a US map shows our nearest neighbors to be Canada and Mexico; armed invasion from either north or south does seem rather unlikely. Moreover, a credible threat to replace our arch-imperial enemy, the Soviet Union, has yet to appear. We are left with threats from one sibling rival to another – China to Taiwan, North Korea to South Korea, Syria to Lebanon, Iran to Israel, etc – and threats to our peace and tranquility from fanatics and nihilists rather than countries.

Attacks by latter-day Muslim Kamikazes on 11 September 2001 were apparently motivated by American forward deployment in Saudi Arabia. The difficulties for a free society in defending against such attacks have been well documented. What tends to be overlooked is the high cost that we have paid since those attacks to vent our anger and to mitigate our fears. We need to be extremely careful to avoid inflicting wounds on ourselves that the terrorists could not, namely becoming estranged from friends and allies, dividing ourselves as a people, and destroying our equity to counter threats that are unlikely to materialize.

“The executive has no right, in any case, to decide the question, whether there is or is not cause for declaring war.” James Madison

Dubious foreign policy 4: Foreign aid

2009-02-26T08:14:00.000-08:00

The area of assistance to other nations offers a chance to practice abroad what we preach at home. Assuming that the target of our assistance is building a free-enterprise system, our assistance can work to our advantage, building both friendship and a trading partner; unless the object of our assistance is to build a free-enterprise system, no amount of aid will improve the quality of life in the country. Some counsel that we should invest in the infrastructures of developing nations; unfortunately, this is an investment in government. Others say that we should bring education to other countries; this might be better, since it is an investment in the young, but it too risks being simply an investment in government-run institutions. Our axiom 4A, “the wealth of a nation is measured by the wealth of its private citizens,” is routinely violated here.

Dubious foreign policy 3: The war on illegal immigrations

2009-02-25T07:37:00.000-08:00

Add to the number of wars we fight the undeclared war on illegal immigrants. To the casual observer, we do not appear to be winning this war any more than we are the war on drugs or the war on terror; the San Diego Union Tribune reported in its 22 March 2005 edition that there were roughly 10.3 million undocumented aliens living in the USA; almost four years later, I’m sure that number has increased. However, like the wars on drugs and poverty, the cost of this fight is high. The adversaries are, on the US Government side, the out-manned, out-flanked, Immigration and Naturalization Service. On the immigration side, Mexican nationals and various others who cross our southern border. While the large majority of these undocumented aliens seek only to work and in doing so greatly benefit our country, a few are smugglers, moving people, drugs, and other contraband, a few are parasites, preying on the immigrants, and a few others are thieves attracted to their wealthier neighbor to the north.

Is there a better way? Can we simply call off the war without being flooded by illegal immigrants, anxious to have their babies born here as instant American citizens, to work tax free, and to receive emergency medical care and even education for their children at taxpayer expense? How would we be protected against drug smugglers and thieves? And how would we benefit, since the USA is getting to be a pretty crowded country already? Axiom 4B, “unobstructed, labor will move to capital and capital to labor,” provides a clue.

“America was indebted to immigration for her settlement and prosperity.” James Madison

Dubious foreign policy 2: The war on drugs

2009-02-24T08:10:00.000-08:00

Wait a second; this is the same bad policy described under domestic policies; am I going to rail against this twice? Yes, because while our war on drugs has created domestic problems, which we have already described in detail, it has also contributed directly to serious international problems. The monopoly status of drug dealers in the USA has made this country an extremely lucrative market by keeping narcotics prices artificially high. There are of course other countries which attempt to control drug sales and use, but they generally represent much smaller markets.

The US market has fueled the rise of plant cultivation, drug processing, and product transportation, protection, and sales networks throughout the world. Some countries, such as Columbia, Mexico, and Afghanistan, have been affected more than others, but in general, since the drug trade defies the laws of several countries, including the USA, members of the drug networks are, by definition, criminals. Unfortunately, the proceeds from the drug trade finances not only these criminals, but are also used to finance terrorist activities. You might say that one war works to negate any positive results from the other.

Dubious foreign policy 1: The war on terror (continued)

2009-02-23T07:51:00.000-08:00

The expansion of federal government scope and power under the GWOT is consistent with a pattern in American history. Beginning most notably with the American Civil War (1861-1865), our federal government has tended to become a much greater part of our lives in times of conflict. Most citizens support our role in these conflicts, often at great cost, because they generally believe that we are on the right side. The morality of our country’s war-time behavior is a legitimate subject of debate, but what must be clearly understood if we are to improve our decision-making skills is that the dramatic expansions of the federal government have been far more extensive than any subsequent contractions. In other words, foreign-policy decisions are reflected in domestic policy and, as a result, we now support a very large and costly public federal infrastructure and payroll.

In regards to the GWOT itself, it’s hard to evaluate our success. On the one hand, there has been no terrorist act on American soil since 11 September 2001; on the other hand, without access to classified information, it’s very difficult for an ordinary citizen to assess the real threat. Regardless, it’s far from clear whether each security threat must be elevated to level of “global war” in order to be addressed effectively. Terrorism is by nature diverse and multi-faceted. We face no single state sponsor or group of state sponsors. In most cases, the terrorists pose an equal or greater threat to their host countries. Therefore, since most of the work of defeating terrorism must be cooperative, the GWOT is simply an elevation of the noise level and the cost.

There is little doubt that the wars themselves have been very costly and they continue. The current administration and the US military are on track to expand the US presence in Afghanistan, where US military casualties are rising. And while Iraq is more stable than it was two years ago, the American presence there continues to exact American taxpayer money and US Army and Marine Corps blood. The absence of an exit strategy for either conflict indicates that the US money and blood will continue to flow.

“How far can you go without destroying from within what you are trying to defend from without?” Dwight D. Eisenhower

Dubious foreign policy 1: The war on terror

2009-02-22T15:23:00.000-08:00

During the Cold War, our single-minded focus on fighting communism led us, at times, to support governments and government leaders who did not represent the best interests of their countrymen. Examples of Philippine President Marcos, the Shah of Iran, and Zairian President Mobutu stand out, but there were many others. One of the dictators whom we armed at US taxpayer expense was named Saddam Hussein. While we say that we won the Cold War, it is very hard to argue that arming dictators, at great cost to us and to their subjugated peoples, had much if anything to do with that victory. It certainly cost us respect, support, and credibility throughout the world. And while I will cite no axiom, I will state that it violates our fourth principle, “be consistent at home and abroad;” I can think of no circumstances where I would tolerate dictatorship in America.

It is clear that a war on terror poses the same risks that we faced in our war on communism; even the word terror is open to interpretation. Most people see terrorism as anti-social, destructive activity. In addition, most people agree the terrorists are deviants, have been driven to desperation by real or perceived events beyond their control, or are simply the dupes of more sinister folks with violent agendas. The problem we face is inherent in these varied definitions – notice that they do not include so-called state-sponsored terrorism, which I prefer to list under acts of war – namely, how to combat terrorism effectively.

Typically, American foreign policy is pursued in a non-partisan spirit. This was true for decisions following the attack on Pearl Harbor, 7 December 1941, which united public opinion and steeled the will of decision makers; they made some understandable decisions, regarding military actions against Japan, and some very poor decisions: after the attack, the US Government imprisoned virtually all American citizens of Japanese ancestry living on the West Coast of the United States and confiscated their property. [http://en.wikipedia.org/wiki/Japanese_American_internment]

That this decision, motivated by prejudice, fear and greed, was legally and morally indefensible was belatedly recognized by the federal government many years after the end of the war. After many of the wronged had already died of old age, concentration-camp survivors received $20,000 each in compensation. [http://www.spiritus-temporis.com/japanese-american-internment/compensation-and-reparations.html] We should have learned from this to honor and defend the laws that protect us as citizens, and to guard against hysterical reactions.
Following the attack by Al Qaida on New York and Washington, 11 September 2001, a Global War on Terror (GWOT) was declared. Much as we counter-attacked Japan after Japanese naval forces attacked Pearl Harbor, we attacked Al Qaida and their Taliban hosts in Afghanistan following the Al Qaida attack on New York and Washington DC 60 years later. Through good timing and good fortune, with the wind of world opinion and cooperation at our backs, and with extensive assistance from the Northern Alliance in Afghanistan, we rapidly uprooted the Taliban and Al Qaida and set the Afghan people on a long – and very bumpy – road to democracy and freedom; well done, for as long as it held our attention.

However, the GWOT became a banner under which the federal government expanded its scope and power: It created the new, sprawling Department of Homeland Security, raising new demands on the federal budget and introducing layers of bureaucracy which compromised the decision-making abilities of existing federal agencies. It federalized inspectors at airports, expanding the population of civil servants. It instituted a so-called Patriot Act [http://en.wikipedia.org/wiki/USA_PATRIOT_Act], allowing government to imprison, without due process, anyone considered a threat for any reason; does this sound familiar? The Patriot Act also dramatically slowed the flow of visitors to our country negatively impacting tourism, American businesses serving a foreign clientele, and graduate schools reliant on talented foreign students. After an investigation into intelligence lapses associated with the Al Qaida attack, the government consolidated our intelligence agencies through the creation of yet another executive-level post. The President and the Senate then collaborated to initiate military action in Iraq. All this might lead one to conclude that the 11 September 2001 terrorist attack succeeded in imposing costs on our country beyond the wildest dreams of its perpetrators.

“'Emergencies' have always been the pretext on which the safeguards of individual liberty have been eroded.” Friedrich August von Hayek

to be continued

Chapter 9: Foreign policies of dubious distinction

2009-02-21T09:56:00.000-08:00

Our federal government is, by design, responsible for more than just domestic policy. The US Departments of State and Defense and the US armed services spend your money and lots of it. As it happens, we can apply economic principles to matters of life and death, war and peace, liberty and oppression, famine and foreign aid, and fair and free trade. Going to war has moral, spiritual, political, and economic implications; sending aid or making loans to other governments, establishing or dissolving diplomatic relations, imposing or removing tariffs, selling arms or preventing arms sales, and encouraging or discouraging immigration or tourism also have international and domestic impact. Likewise, domestic decisions, such as subsidizing local industries, running fiscal deficits, and changing interest rates have international impact. In the next few days, I will look examine five policies that have been equity destroyers.

Strategy and Actions - 11: End the current recession

2009-02-19T08:08:00.000-08:00

Lucky number 11 – here’s one “for free.”

Goal 11: End the current recession.

Strategy 11: Decrease the load on the private economy.

Actions 11: Declare a moratorium on bailouts; reduce government taxes and spending.

Explanation 11: Employers, consumers, lenders, and market makers are tapped out. Too much debt and not enough income has ground the private economy to a halt. The government can only “create jobs” by taking money from and destroying jobs in the private sector. The prevailing view, at least in Washington DC, is that the free market failed and that government must now rescue the economy. The prevailing view is wrong. Government over-stimulated the economy through debt and excess liquidity. Now, high taxes and massive debt are crushing what’s left of the private economy and the free market.

Working for a living is like climbing a very long hill. The more you work, the more you gain. Hopefully, your gains and accumulated equity match or exceed your needs resulting in a satisfying climb and quality of life. However, if we load you down, if you must carry not only your own pack, but the packs of many others, your climb becomes more difficult. There comes a point when the load is too heavy. We appear to have arrived at the point where we must lighten your load, or you too will falter and have to be carried by someone else. The load, of course, is the burden of government spending and debt, not just at the federal level, but at state and local levels as well.

Lower government spending – bailouts go in the wrong direction – and lower taxes will hasten the day when your climb becomes bearable and sustainable once again.

Strategy and Actions - 10: Remove barriers to risk-taking among entrepreneurs

2009-02-18T08:18:00.000-08:00

Goal 10: Remove barriers to risk-taking among entrepreneurs.

Strategy 10: Restore balance to product liability law.

Actions 10: Set limits on damage awards where criminal intent is absent. Assess court costs on plaintiffs in frivolous lawsuits.

Explanation 10: In cases of product liability or misuse, where there is no criminal intent on the part of the manufacturer or the seller, clear limits are needed on liability. There are free-market responses – insurance – for both provider and user. However, since the possibility of criminal intent cannot always be excluded, there is no reason to eliminate trial by jury in cases of product liability. This provides protection of our free-enterprise system. Along with limitations on the size of awards, commensurate with damages and the extent of defendant liability, it is reasonable to require plaintiffs to pay court costs, particularly in the case where suits are clearly frivolous. This is not always clear cut and should be left to judicial discretion. Just the idea that there might be costs connected with frivolous lawsuits would decrease their number according to Axiom 3B (To obtain less of something, tax it).

“You can always count on Americans to do the right thing - after they've tried everything else.” Winston Churchill

Strategy and Actions - 9: Energize our education system at all levels

2009-02-17T20:31:00.000-08:00

Goal 9: Energize our education system at all levels.

Strategy 9: Keep education money in the community.

Actions 9: Eliminate the federal Department of Education. Eliminate federal subsidies for college education.

Explanation 9: Clearly, keeping education money in the community is quite the opposite of sending education money far away, to Washington DC for example. This is another case where it is critical to distinguish between goal and strategy. Our goal is to improve the education available to our children; there is no correlation between this goal and sending money for education to Washington. Au contraire mes amis. The key predictor of how close a child will come to realizing his potential in school – for most children, that potential is high – is parental involvement, both at home and in his school. Aware, involved parents have their children ready for school, rested, fed, and eager to learn. Those parents provide a stable environment for study at home and are aware of the challenges and opportunities in the classroom. They meet and get to know their children’s teachers and they lend a hand, giving time, resources, or both, when needed. The children see the importance their education holds in their parents’ eyes and rise to meet expectations.

Obviously, children who don’t have a stable home environment have challenges, such as basic survival, that go well beyond attaining a quality education. However much I would like to help such children, I am certain that sending more money to Washington is not the way to do that. I would prefer to see the aid go through local charities, local churches or synagogues, or local school systems – anything but a Washington agency.

I am not convinced that every child needs to go to college; I am certain that not every child needs to attend college immediately after high-school graduation. Improved elementary and high-school education may decrease the need for college. This could be a terrific benefit in several ways. First, more high-school graduates entering the job market would increase the labor pool at a time when our population is aging. Second, high-school graduates delaying college would take demand pressure off colleges thereby lowering the price of a college education. Third, it would raise the quality of our college student population by providing alternatives to students who don’t really want to go to college (but feel that without college, they can’t find a job). And fourth, it would influence some to delay college until they really know why they want to go and are able to pay their way, raising their chances of success and lowering their prospective debts.

Students who have already been in the work force would have two options to pay their college expenses: they could use money saved from work, especially if they could live with parents prior to entering college; and, they could continue to work part-time while attending school. Although it takes longer to complete a college education while holding a job, there are several benefits to doing this. First, the student gains an enhanced sense of accomplishment. Second, the student is forced to become very self-disciplined. Third, the probability of employment after college increases. Fourth, possibly most important, the student becomes a very aware consumer of education, having to pay for it with hard-earned money. This final benefit, resulting from removal of subsidies, will both decrease the cost and raise the quality of college education. On top of this, students whose parents have had the foresight to invest in Life Savings Accounts may have access to financial help directly from their families.

There are other ways to improve the quality of elementary and high-school education, such as increasing competition and reducing interference from educrats (people who don’t actually teach, but are paid to tell real teachers how to do their jobs) in the classroom. Competition can be expected to lead to new kinds of job and career-oriented education and decrease costs by decreasing the load on traditional government (public) high schools.

Underlying the idea that there can even be competition among government schools is the assumption that individual schools can be autonomous. My observation has been that most teachers (in San Diego) are both competent and dedicated. However, pushed by (state) bureaucracies to implement the latest trend, teachers are often thwarted in their efforts to apply their own skills and creativity most effectively.

A “sad-but-true” case in point was made to me by my son several years ago. He described group math, a faddish approach imposed by state educrats on his eighth-grade algebra teacher. The apparent intent of group math was to avoid situations where any students unable to solve problems might feel a loss of self-esteem. In a case of good intentions run wild, solving problems in a group led to a situation where most of the group would wait for the best problem solver to complete the work, and then copy his solution. The result was that, not only did the best problem solver get better, by solving all the problems; the remainder of the group grew dependent on him. And, just to illustrate that the children are far ahead of the well-intentioned, fuzzy-thinking outsider adults, my son explained in a moment of politically-correct comedy that “solving for ‘x’ is no longer important – what is important today is how we feel about solving for ‘x’.” The point is that it would help our kids if we let teachers teach and parents choose; these are not federal government issues.

But wouldn’t eliminating the Federal Department of Education just hurt our children? Your kids go down the street to attend school to get an education. You go to the neighborhood market to buy food for the family. If it’s a good idea to send some of your education money to Washington DC, why not send some of your family food dollars to Washington as well, on a volunteer basis, of course?

Interruption to pan the stimulus idea

2009-02-11T07:53:00.000-08:00

As the new administration and legislature put forth ever more costly "stimulus" plans, it's somehow comforting to know - just before going over the cliff - that salvation does lie in the opposite direction. The underlying problem, as brought out time and again on these blog posts, is that we are addicted to debt on many levels, from credit cards to no-money down mortgages, from city governments to state governments, and from the federal government to eternity. Even while the prevailing wisdom is leaning (or falling) for more government spending and more debt, this is not a time for a new "fix" to postpone "withdrawal" from our debt addiction. It is a time for drastic tax and spending cuts, a time for "homeowners" with negative equity to become renters, a time for businesses and government to cut salaries rather than employees, and a time to save rather than spend.

A few words about the "homeowners" (you are one, according to some, if you have a mortgage) and the banks. I understand that "derivatives" are a problem, but the bigger problems are 1) foreclosures where families are forced to move and 2) an inability to value mortgages. Both problems could be solved through a three step process: first, the mortgage holder takes possession of the home where mortgage payments have stopped; second, the mortgage holder rents the property out at market rates, in most cases to the present occupant; and third, the mortgage holder reassesses the home based its value as rental property and then writes off the balance of the mortgage. The great fear is that there will be bankruptcies - and there will be once the reassessment plays out - but bankruptcies are nothing more than orderly processes to salvage value in debt crises. The big advantage is that neither banks and nor "homeowners" need to be bailed out. Moreover, once homes are marked to present value, the real-estate industry will be back in business.

Strategy and Actions - 8: Strengthen international relations and national prosperity

2009-02-10T08:18:00.000-08:00

Goal 8: Strengthen international relations and national prosperity.

Strategy 8: Practice free trade.

Actions 8: Repeal “anti-dumping” laws. Repeal excessive tariffs. Repeal restrictive covenants that bar non-union workers from certain jobs. Repeal all industry and agricultural subsidies.

Explanation 8: Free trade begins at home and it is good for us. In a way, it would be nice not to know how companies in other countries went about producing goods and services, whether they were less heavily taxed or more heavily subsidized than like businesses here, whether they unfairly exploited their employees, or whether they polluted their environment. Then, we could decide to be free traders simply based on the advantages to us; and there are advantages. Today, we buy most of our oil overseas; recent price fluctuations notwithstanding, the cost of raising a barrel of oil in Saudi Arabia has typically been so much lower than it is here that, even adding in the cost of shipping, we can scarcely turn it down. Our ingenuity and capital are better spent in providing household appliances, electronic products, medical supplies and pharmaceuticals, aircraft, and countless other goods and services.

Full participation in the interwoven global economy yields mutual dependencies – the source of both agreements and disagreements – as well as wide access to offshore products. Free trade allows us to specialize in value-added products. High-quality, low-priced consumer electronic products, such as video cassette recorders, have given an enormous boost to entertainment and advertisement media. We also benefit from our extensive investments and holdings abroad.

But what if a company from another country wants to sell a product, such as airplanes, in our country, in direct competition with our own suppliers? Is that good or bad? It's good because it provides competition, the key to higher quality and lower price (great for our airlines and their passengers in this case). But what if the foreign company is being subsidized? The taxpayers of the other country are helping us to buy the planes cheaper, but won't that hurt our aircraft builders? In the short term, it might, but long term, the company that bases its decisions on its customer needs and market forces rather than on government decisions will prevail in the market place. Meanwhile, the subsidies to the off-shore aircraft manufacturer are coming from other off-shore companies – remember that real money has to come from somewhere in the private sector – who are thereby rendered less competitive.

Therefore, it is in our best interest to avoid government interference such as subsidies, tariffs, and import restrictions. The concept of retaliation deserves mention because it is senseless. If another country chooses to punish its consumers, should we punish ours? This approach is similar to you running home to beat your kids the moment you learn that I have been beating mine.

Can free trade be this easy? During the 1970s and 1980s, Japan was the country whose products we loved and whose producers our politicians loved to criticize. In the 1980s, it appeared to some that high-quality, low-price integrated-circuit chips from Japan would eat all of technology and that the USA would be reduced to a technological have-not. What really happened? Computer manufacturers in this country responded by buying those chips and turning out high-quality, low-price computers, allowing this country to widen its lead in that key industry. Semiconductor houses in this country responded to the challenge by producing very reliable, high-performance integrated-circuit chips that propelled our computer manufacturers even further ahead. The new high-speed, high-capacity, low-price computers gave our software writers the opening and the incentive to create very sophisticated applications. And now we have the Internet and much more. All of this happened in spite of unfair trade. Moreover, Japanese Government interference ultimately hurt the Japanese economy very deeply.

Strategy and Actions - 7: Reduce the cost and improve the responsiveness of health care

2009-02-04T14:59:00.000-08:00

Goal 7: Reduce the cost and improve the responsiveness of health care.

Strategy 7: Eliminate subsidies for health insurance.

Actions 7: Eliminate tax deductions for employer-provided health insurance.

Explanation 7: My employer now provides me health insurance below cost. Not only do I get more insurance than I might otherwise buy, this well-intentioned policy increases costs to other people, such as those in business for themselves, who are not subsidized in this way. The subsidy increases the supply of capital to pay for my insurance and by extension, my medical costs, thereby driving up both the demand for and the price of insurance and medical treatment.

By eliminating the subsidies and breaking the link between place of employment and health insurance, prices will be lowered, costs for company employees and the self-employed will be leveled, and the savings from money now committed to employer-supplied health insurance will be divided between me and my employer. I will be able to take responsibility for seeking insurance that meets my budget and health care that meets my needs. The newly enlarged free market will deliver quality health care to me, the self-employed, and the unemployed.

Lower prices are possible with competition. Years ago, Fortune magazine (5 April 93) pointed out that eye care, which is unregulated and relatively uncovered by corporate health care plans, had seen relatively flat prices since 1972 for eyeglasses and sharp price declines for contact lenses. In my experience, the same can be said today.

By the way, does more health care buy us better health? If that were true at an individual level, couldn’t we make a case for visiting the doctor more frequently? Why not a monthly or even a weekly check-up? The real answer is much more complex. We would all be healthier if we adopted healthier life-styles emphasizing age-appropriate diet, exercise, and rest and de-emphasizing destructive activities like smoking, reckless driving, over-eating, and gambling.

However, conscientious or not, we are all vulnerable to injury and illness. The choice of whether or not to visit a doctor during illness or following injury is important. Equally important is our choice of doctors. These choices are facilitated by education; they are hindered by arbitrary third-party rules that restrict choice. Here is an opportunity to be both pro-choice and pro-life.

Strategy and Actions - 6: Vitalize our entry-level job market and encourage apprenticeship

2009-02-03T07:54:00.000-08:00

Goal 6: Vitalize our entry-level job market and encourage apprenticeship.

Strategy 6: Legalize work at all wages.

Action 6: Eliminate the minimum wage.

Explanation 6: The misguided policy of requiring employers to pay a minimum wage closes the job market to those whose skills cannot command the mandated cost to employers. This policy strikes hardest at those least able to bear the burden, the poor. It has the effect of shutting the door on those who might be considered reasonable risks at lower cost. Many young people are considered high risk because they have never worked. They can not get jobs because they do not have the necessary skills and experience. The best place to get both is on a real job. There are periods during every employee's tenure, usually at the beginning, when he costs his employer more than he brings in. But, employers need employees and by letting both enter freely into wage agreements, we can reopen the job market and the best type of training for the untrained. Those who take advantage of the jobs and the training that comes with them will, in general, increase their value and their earning power.

It is true that a special “youth minimum wage” provides for employees under 20 years old to be paid a minimum of $4.25 during their first 90 days of work. While a lower minimum is clearly less restrictive, this is both unfair and inefficient. Recent immigrants, recently-released prison inmates, mothers returning to the workplace after raising children, or others lacking in recent work experience should not be excluded any more than young people. Moreover, with the higher minimum looming after 90 days, employers may choose not to hire in the first place or choose to terminate the young employee after 90 days. Who could possibly understand all employer and employee circumstances throughout the country well enough to tell us what the correct minimum wage should be?

I have also heard it said that people have a hard enough time now living on the minimum wage; I believe it. Missing from this discussion is the point that the minimum wage prevents entry-level jobs from being created, especially for young people. If the opportunity is there for the young to work, at whatever wage, they will begin to climb the job skills and wages ladder when they can really afford to do so, before they take on family responsibilities. This is the basic rationale for apprenticeship programs. The answer to low wages is a vibrant, competitive economy rather than a law against working.

“But, without a minimum wage,” you ask, “won’t employers immediately set about exploiting employees?” That is, of course, a very misleading question, because use of the word exploiting implies that people do not enter into work environments of their own free will. Because we live in a relatively free country – which we would like to make even freer – the answer to the question of exploitation is “no!” The free market works for labor just as it does for commodities or manufactured goods. The best way to improve earning capacity on the job market is to acquire skills and experience, by working, learning, and creating equity in the enterprise. The primary instance in which competition for labor does not now apply is at the lowest wage range. “But, without the minimum wage,” you ask, “won’t there be people working for very low wages?” Yes, there will be, and that will indicate employment and growth throughout our society, to the benefit of all of us. Consider the effects of coupling this policy with a flat income and negative income tax.

Strategy and Actions - 5: Reduce interest rates and housing costs

2009-01-31T20:34:00.000-08:00

Goal 5: Reduce interest rates and housing costs.

Strategy 5: Remove government subsidies on housing.

Actions 5: Phase out income-tax deductions for home-mortgage interest payments. Dissolve Fannie Mae and Freddie Mac.

Explanation 5: While credit has largely dried up for now, especially in the home mortgage market, this strategy still has advantages. Prior to the housing crash, tax deductions for home-mortgage interest payments were subsidizing home loans thereby generating more such loans and higher interest rates. This policy distorted the housing market by increasing demand without increasing supply, thereby raising prices. It was regressive, since it rewarded those with expensive homes and high mortgages; the subsidies are paid by taxpayers with lower incomes and lower mortgages or no mortgages at all. Since some homeowners have made important long-term investment decisions based on mortgage-interest deductibility, homeowners need a transition plan which allows time to adjust to new policy. It is quite reasonable to phase out such deductions over several years as was done for other deductions when federal income taxes were temporarily simplified in 1982.

When we combine the elimination of deductibility for home mortgages with the introduction of Life Savings Accounts and their application to home purchases, we are very much in harmony with Axiom 1A, “equity financing is desirable,” since buyers will be using more of their own money and less borrowed money to buy that first home. This is also an explicit recognition of the fact that purchase of one’s own home is an important step towards long-term financial well-being and an integral part of retirement planning for most people. The emphasis on equity restores integrity to the term home-owner because more home-owners will own more (and banks less) of their homes.

In light of recent events, it is pretty clear that banks and financial institutions would be acting in their best interest by only offering mortgages they intend to keep, backed by the collateral of a properly appraised home, the presence of a significant down payment (20% or more), and a sober evaluation of the borrower’s ability to make the monthly payments. Creation of Fannie Mae and Freddie Mac give lending institutions the option of passing their mistakes off to a government backed third party at taxpayer expense in direct violation of principle 3, “neither encourage bad nor discourage good economic behavior.”

As for the desperate attempts by the Federal Government to prop up the mortgage market in 2008, the less said the better. This direct violation of the fundamental precept of this book, build equity, is directly undermined by the mad rush of government to encourage more debt.

Strategy and Actions - 4: Increase investment and employment

2009-01-30T12:18:00.000-08:00

Goal 4: Increase investment and employment.

Strategy 4: Constrain government spending.

Actions 4: Limit government spending, by law, to a percentage of gross national product; eliminate the corporate income tax.

Explanation 4: In discussions of government spending, politicians used to advocate balanced budgets. This year, that seems a quaint notion as the new president and the congress compete to offer ever larger bailouts and stimulus packages to just about everybody (with the possible exception of CEOs). In any event, to protect our equity, it is necessary to reduce the load on the private economy and the taxpayer. The greater the burden the private economy is asked to carry, the more it will falter.

Two of our axioms relate to reducing spending. “All government spending is a tax on the wealth of the nation” (Axiom 1C) and “There are three ways to pay for federal spending: taxation; borrowing; inflation” (Axiom 1D). Taken together, these axioms make clear that simply attending to one, or even two, of the ways in which spending is financed leaves unresolved the central problem of how much to spend. Axiom 1D tells us that money to fund the federal government not raised through borrowing will be raised through taxation and inflation; axiom 1C tells us that this matters.

The approach proposed here is far more direct. By assessing our ability to spend for government (our gross national product is a measure of that ability), we are able to set an upper spending bound. Given the tendency of our representatives to spend all available money (and much more), it would be naïve to expect them to take the next logical step, to realistically assess the needs of the nation. Even assuming that this very sensible step is skipped, we will be left with a budget at the upper bound, a given percentage of gross national product. Envision a scenario where the United States Congress would partition the funds according to the various compromises inherent in the budget-making process and the president would sign if and only if the budget was within bounds. This approach would require no new legislation and setting a spending limit is far easier and more beneficial to the country than predicting deficits or surpluses.

Elimination of the corporate income tax directly supports our goal of increasing investment and employment. The current corporate income tax is a direct tax on business rather than on the gains of individuals. This imposes double taxation on those who received corporate salaries and dividends. By the way, when it was recently decided to reduce taxes on the dividends, the neutrality of taxation was violated; that is, dividends were assigned a higher value than earnings from working. It would be far better to address the problem by eliminating the corporate income tax since that tax is a heavy drag on business development, operations and profit. As we know from axiom 1B, business profits are essential to a healthy economy and a resulting healthy job market.

You may ask whether “wealthy corporations” should be able to escape taxes. As mentioned above, it is important to distinguish between the abstraction of the corporation and the people working for and invested in the corporation. When those people actually receive money, through salaries or dividends, that money would be taxed. Once the corporate tax was eliminated, corporate directors would have the option of investing the additional money in the corporation – thereby creating jobs and expanding the tax base – and taking the money for themselves in higher salaries or dividends, thereby increasing their own revenue and taxes. Almost as important in this equation is the ability of US corporations to compete with corporations from other countries which do not impose corporate taxes. The chances of US corporations choosing to operate from those same countries would also be reduced.

“Where is the politician who has not promised to fight to the death for lower taxes- and who has not proceeded to vote for the very spending projects that make tax cuts impossible?” Barry Goldwater

Strategy and Actions - 3: Reduce Poverty and Homelessness (part 2 of 2)

2009-01-29T08:18:00.000-08:00

Is a flat tax fair? Is it fair to tax the low earner at the same rate as the high earner? The confusion between tax rate and tax revenue, introduced by this question, can be reduced by asking the question in two parts. Is a flat tax fair to the high-income earner? Yes, because even though he must bear almost the entire burden of supporting the federal government, he and those who depend on him can base income-related decisions on a fixed rate of return. Is a flat tax fair to the low-income earner? Yes, because his share of the government load is either very low or negative. Is a flat tax efficient for the government? Yes, because the government will have access to a significant share of a growing economy. By the way, the rulers of the old Soviet Union really understood the concept of fairness: make all citizens equally, devastatingly poor, except for the elite, those in government.

It is tempting to propose eliminating taxes on interest from savings accounts and on capital gains. These taxes do inhibit investment. However, I believe that a better approach is to carefully constrain the size and cost of government. Taxing all forms of income at a relatively low, flat rate would be tax-neutral, neither encouraging nor discouraging purchases. If I want to buy a new car – which could be critical to the health and safety of my family – instead of saving my money, why should the government be involved in my decision in any way? Of course now that the debt window has slammed shut, consumers are once again in demand; the difference now is that consumption will be financed the old-fashioned way, through saving – which, by the way, I advocate. We consumers share the economy with producers; we need each other. Increasing equity includes saving and investing money; buying material goods can increase equity.

In 2005, the idea of a federal consumption tax began to receive national attention. I don’t know if this will come up again, but for the record, I oppose this idea for three reasons. First and foremost, a federal sales tax invades the territory now held by state and local governments which depend on sales taxes. It is bad enough that the federal government spends far more than state and local governments combined; bad because, as we have already mentioned, state and local governments do most of the real work of government; it would be unpardonable for the federal government to cripple the ability of states and municipalities to raise needed funds. The federal government already uses three powerful tools – income tax, borrowing, and inflation – to raise money; it does not need a fourth.

Second, a sales tax is regressive. We just discussed the fairness of a flat income tax. A consumption tax is anything but fair, since all citizens, regardless of means are taxed the same amount when they purchase the basics, food, clothing, shelter, transportation, etc. In other words, lower income earners are taxed at a rate that takes from them a higher percentage of their income. And while saving money is a worthwhile and worthy exercise, and a consumption tax encourages saving, those with relatively less to save will be hurt relatively more by such a tax.

Third, a consumption tax discourages consumption (Axiom 3B). It will hurt more or less depending on the rate. Of course, as we have already seen with Social Security, Medicare, and the Minimum Wage, rates can rise, and over the years, once policies such as a consumption tax are in place, they never die.

Another guideline is that necessary government services should be provided at the lowest possible level. The further I send my tax money from the point of service, the less efficient that service is likely to be. The federal government is the right place to address national defense, international relations, border control, free-market protection, and currency maintenance. Highways and universities are best operated at state levels. Public schools, city streets, fire fighting, police service, sanitation, and welfare are best addressed at local levels. The closer to home we can provide charity and welfare, the more likely it is that the needy will actually receive help.

We sometimes hear it said that it is irresponsible to reduce taxes because we cannot pay for a tax reduction when we have to pay off that horrendous national debt. Clearly we need to reduce spending so that we can reduce taxes and the debt. I assume that’s what is meant by paying for a tax reduction, a rather bizarre concept since a tax cut simply implies that I can keep more of the money I have earned by working.

The flat-and-negative-income tax does represent a different approach. It offers aid without patronizing restrictions or vast bureaucracies. It provides incentives to work and earn rather than a loss of aid once work begins. It includes incentives to come together as families rather than incentives to stay apart. It features incentives to raise children rather than simply to bear them. And last but definitely not least, it simplifies taxes dramatically and lightens the burden of tax preparation for millions of citizens.

Strategy and Actions - 3: Reduce Poverty and Homelessness (part 1 of 2)

2009-01-28T07:42:00.000-08:00

Goal 3: Reduce poverty and homelessness.

Strategy 3: Restore efficiency to our tax code.

Actions 3: Institute a flat income tax rate and a negative income tax.

Explanation 3: Some say that the income tax should be abolished; I say that debt and inflation are not more efficient than taxes for raising money, but that we need to collect and use taxes efficiently. An approach, far superior to the patronizing mess that is now the entitlement system was advocated many years ago by Milton Friedman. [Friedman, M., Capitalism and Freedom, University of Chicago Press, 1963] Dr. Friedman proposed a flat tax and a negative income tax which would accomplish a great deal more at much lower cost. The negative income tax sets a zero-tax point above the zero-income point. Below the zero tax point, the government provides a refund (The current earned-income-tax credit is a limited, needlessly complex step in that direction.).

For example, imagine a federal income-tax rate of 16% and a zero-tax point of $25,000. If I earn nothing this year, I pay 16% of $0 - $25,000 in tax; in other words, I pay a negative tax equivalent to a refund of $4,000. If I earn $15,000, I pay 16% of $15,000 - $25,000 in tax, a $1,600 refund giving me a net income of $16,600. If I earn $25,000, I pay $0 in tax and my net income is $25,000. If I earn $40,000 I pay $2,400 in tax for a net income of $37,600. In this example, everyone keeps $0.84 of every dollar they earn (before computing state and local taxes).

This policy, which was proposed by Governor Jerry Brown during the 1992 Democratic nomination campaign, would restore the flexibility that people need to get by on low incomes. In the example above, a couple who earned nothing at all would still have access to $8,000, enough to at least increase the chances of survival; help from their families of origin would further increase those chances. However, that is hardly the end of the story. Incentives to work would be strong since tax penalties would be low (and since $8,000 does not go very far these days). An able-bodied adult would be highly likely to strive to improve his lot once his bare necessities were met; since this approach provides plenty of incentive for high-income earners to be as productive as possible, he would be far more likely get a break in the resulting vibrant economy. Also, if he were physically unable to do any kind of work, it is more likely that money would be available through charity to keep him afloat.

What should the tax rate and zero-tax point be? That will depend on what funds are needed to provide the services we need and on what negative taxes (refunds) make sense. It also depends on what we can afford. There is reason to believe that there is a tax rate which maximizes returns to the government; W. Kurt Hauser, writing in the Wall Street Journal, tells us that the "percentage of gross domestic product collected in taxes, regardless of tax rates [is] 19.5%." [Hauser, Kurt, (Title misplaced), Wall Street Journal, 25 March 1993]

Logic tells us that a tax rate below 19.5% could not possibly yield 19.5% of gross domestic product; however, logic and axiom 1F tell us that a reduction in the tax rate will bring a rise in the gross domestic product. The result would be a broader tax base and a stronger revenue stream. As we are currently seeing, there are other ways to raise money to fund the government.Children are essential to our future and children are costly to raise; however, I do not want the negative income tax for children to be a subsidy on those children. A compromise between providing no child support and providing full child support is to phase in child support.

In other words, at birth, a child would receive no refund; at age 18, the child would be eligible for full refund (eligibility might be based on full-time attendance at a college or university, a full-time job, or a combination of study and work). In between, the child would receive a pro-rated refund (for example, a half refund at 9 years of age); in general, the actual refund, or tax deduction, would be made available to his parents just as are current tax deductions. This would subsidize caring for children, rather than simply bearing them, and would acknowledge that the cost of child support increases with the age of the child. It would also provide the same support for young people who choose college as for those who do not. This position represents how I wanted to be treated before I was eligible to vote. Note that this scheme neither promotes nor penalizes families or marriage, as do current schemes. It is humane: guaranteed income; opportunities to advance; no bureaucracies; and no restrictions. Note: from age 18, it should be required to qualify to receive the negative income tax; I will not get into details, but working at a steady job or studying in an accredited college or university would be a necessary part of qualifying.

to be continued...

Strategy and Actions - 2: Restore economic planning to individuals

2009-01-27T09:00:00.000-08:00

Goal 2: Restore economic planning to individuals.

Strategy 2: Phase out all restrictive transfer payments.

Actions 2: Eliminate social security in favor of Individual Retirement Accounts or more comprehensive Life Savings Accounts; eliminate food stamps and other welfare payments in favor of a negative income tax; eliminate Medicare.

Explanation 2: So-called entitlement programs move money from one group (taxpayers) through the government to other groups with strings attached. These strings relate to when you are “entitled” to get the money (for example, during retirement or unemployment) and what you can buy with it (for example, food or medical care). Since I cannot possibly decide how and when it is best for you to use your money, I have no reason to believe that the government can. I do know that as a taxpayer, you are deprived of both your money and your choice. Moreover, in the case of Social Security, money is effectively being transferred from the working young and their dependent children to the non-working old. Social-Security imposes taxes on labor which reduce job opportunities. And, punitive tax rates discourage Social-Security recipients from remaining in or reentering the workforce. The whole entitlement system imposes a heavy tax on private enterprise.

“You cannot help men permanently by doing for them what they could and should do for themselves.” Abraham Lincoln

Eliminate social security? Isn’t that a mean-spirited, reactionary idea? I will describe a transition strategy so that you can answer that question for yourself. Social security must be phased out gradually in order to satisfy previous agreements between social-security recipients and the government. One example plan for a phase-out is to return previously contributed funds to all workers under some age, say 40 years (the Ron Paul “opt out” plan) and to older volunteers, and to continue to tax and pay all others as is done currently. We do know, as the old cliché tells us, that we’ll never get out of this hole if we just keep digging.

The phase-out approach has three advantages: plenty of time is allowed to those who can adjust and provision is made for those who can not; a clear path to a worthwhile goal is established; and, my grandchildren will thank me rather than spit on my grave. While the transition does not come free – buyouts will cost big money – this is a plan to pay down a staggering debt (estimated by some, as mentioned earlier, at $20 trillion). Paying a lot now is better than paying still more later, especially for the very young. Of what value is a so-called safety net if it is lying on the ground?

But you’re skeptical, and rightly so. Paying off Social Security sounds too good to be true. Can we really find the money to do this? This will be a colossal sum of money, and in “normal times,” it would a considerable amount of time to disengage since it took us a long time to get in this deep. But these are hardly normal times; huge “stimulus packages” are being proposed as we speak. That money could be used to make the buyouts, putting money in the hands of private citizens with real needs. I wrote earlier that each plan should be able to stand on its own; eliminating Social Security is no exception. However, the transition out of Social Security will go down much easier if it is part of a larger package. We will return to this issue.

To promote retirement saving, the federal government has created two kinds Individual Retirement Accounts (IRAs), one which defers taxes on contributions (taxes are paid at the time of withdrawal of funds which are treated as regular income during the tax year of withdrawal) and another, called a “Roth Account, which features tax-free capital gains; the government has also created 401(k) savings plans, for those working for other people; these accounts allow tax-deferred contributions by employees and matching contributions from employers. While these are superior to Social Security, in that contributors control their own funds, they are restrictive, worshipping as they do, the “false god” of retirement; there is a better approach.

Consider the idea of a Life-Savings Account (LSA) which would allow tax-deferred contributions and would extend the range of options for withdrawing money. For example, money could be withdrawn – as taxable income – from an LSA for medical emergencies, to purchase a home, to pay for your education, to pay for your children’s education, or to pay for your retirement. A range of financial instruments would be available to savers, from corporate stocks and bonds to municipal and government bonds (an efficient way for government to borrow money). In addition, as hinted above, equity in real estate – one’s own home for example – would be a legitimate investment. Saving, for retirement or any other reason, is best done using a consistent, long-term approach. The incentive for contributing to an LSA would be tax deductibility; the incentive for leaving money in would be the continued building of equity, available for example at a lower tax rate following retirement.

Surely there couldn’t be a more mean-spirited, scrooge-like action than to eliminate food stamps. Let’s think this through: if you need money and I give you food stamps, I’m telling you that I believe that you need money, but I don’t trust you to spend enough of what I give you for food. However, if you need medicine or transportation, you will have to do without unless you have other money. Of course, you could sell the food stamps for money, but if that’s the case, why can’t I just give you real money in the first place and let you take responsibility for spending it on what you need? We’ll discuss more general direct transfer payments under the next strategy.Aren’t all older people destitute and in need of the special advantages of Medicare and Medicaid? No! That is patronizing elitism. The message from our government is that we are unable to plan and provide for our own medical care after a certain age. Moreover, insurance companies, anxious to reduce benefits (leading to reduced premiums), already advocate prevention, the healthiest behavior. If you are now over 65 years old, I am willing to bet that you did not become instantly stupid and poverty stricken on your 65th birthday.

Strategy and Actions - 1: Reduce illegal drug use and drug-related crime

2009-01-26T07:45:00.000-08:00

The strategies and related actions below (and in subsequent posts) which address our ten domestic goals are designed to be in harmony with the axioms to assure that unintended consequences are minimal.

Goal 1: Reduce illegal drug use and drug-related crime.

Strategy 1: Decriminalize the use of drugs among adults.

Actions 1: License pharmacies and liquor stores to dispense widely-used narcotics (marijuana, cocaine, and heroine) to adults, just as they now sell alcohol and tobacco. Repeal laws that make it a crime for adults to possess or use narcotics. Retain laws that make it illegal to sell narcotics, alcohol, or tobacco without a license. Retain laws that make it a felony to dispense narcotics to minors without a physician’s prescription. Retain laws that make it a crime to operate a motor vehicle under the influence of narcotics or alcohol. Increase investment in treatment and education to reduce general drug use. Increase investment in preventing the sale of narcotics, alcohol, and tobacco to minors.

Explanation 1: As mentioned earlier, current policy, the so-called war on drugs, has created two criminal classes, sellers and users. Sellers maintain their monopoly and high prices through force; users often commit crimes to maintain expensive habits. Decriminalizing narcotics use would break the monopoly and the resulting competition would restore lower prices. This would effectively reduce drug-related crime, a replay of the repeal of prohibition that eliminated alcohol-related organized crime in the USA in the 1920s. This would also reduce profits to international drug cartels which terrorize their own countries even more than they plague us. As a side benefit, reducing drug-related crime would free resources to address more serious crimes.

Does this strategy put the government in the position of legitimizing drug use? No more and no less than the government now legitimizes the use of alcohol, tobacco, and automobiles, all of which kill thousands each year (41,059 people died in traffic accidents in the USA in 2007). However, legal use of all of these products is limited to people who have reached an age where they are presumably capable of making responsible decisions. Likewise, use of narcotics by minors should be prohibited and enforcement focused on keeping narcotics out of their hands; policies on narcotics, alcohol, and tobacco should be congruent. Getting pushers off the streets by legalizing the sale of narcotics in liquor stores and pharmacies would make narcotics less visible and less accessible to children. This is a case where it is critical to distinguish the goals – reducing illegal drug use and drug-related crime – from the strategy.

Would decriminalization reduce drug use among adults? Yes, but not immediately. Most abusers started using drugs as minors, just as most adult smokers starting using tobacco as minors. Over time, reducing the use of narcotics among minors would reduce the adult user population. In addition, research and education, supported by taxes on narcotics, could be expected to reduce drug use. In effect, users would pay to help solve their own problem. This approach has reduced the use of tobacco; teenagers today are much more aware than their parents were of the dangers of tobacco use. Under decriminalization, the user, no longer a criminal, would be less of a danger to others and more likely to be open about his habit. This would make him a better candidate for treatment. Because drugs would be less expensive, it would be less likely that a user would steal to support his habit. And because narcotics would no longer be illegal, the element of danger and adventure in their procurement and use would be reduced.

We are not discussing a panacea here. Drugs will always make users dangerous to themselves and to others. Users destroy equity by burning money, destroying careers, isolating themselves from those who care about them, and dramatically increasing the level of risk in their lives. There will continue to be obvious examples of this danger, such as in the operation of a motor vehicle. Driving while intoxicated is already a crime, whether the agent of intoxication is alcohol or some other narcotic; there are good reasons to enforce this law strongly; alcohol-related traffic accidents claimed 13,000 lives in the USA in 2007.

There will also continue to be individual tragedies where drug use destroys lives and decimates families. However, we cannot allow our abhorrence of drug use to persuade us to retain policies that have failed; that, to restate the obvious, would be confusing the goal with the strategy. Nowhere in the world has criminalization eliminated drug use. Now is a good time to reread our 18th and 21st amendments. We tried prohibition of alcohol use; that failed. When we finally recognized that it had failed, we changed our laws, and we reduced alcohol-related crime. We never said that alcohol abuse was healthy. Rather, the 21st amendment is an admission of two things: the federal government cannot solve every societal problem; and the federal government can make some problems much worse. A similar dose of common sense would be a welcome change in our fight against drug abuse.

But isn’t legalization really just a hippie conspiracy? Would you start using dangerous drugs if that was no longer a criminal offense? Would you also begin buying dangerous drugs for your children? If not, why not? Do you think that your fellow citizens are so much less intelligent than you are? Do you think there would be a greater or smaller supply of dangerous drugs – and drug gangs – if we broke the drug monopoly and those drugs cost less? Do you really think the federal government will solve the drug problem for us? How did they do with the alcohol problem in the 1920s? In your opinion, has the repeal of the prohibition on alcohol use damaged the country?

Transition

2009-01-25T14:52:00.000-08:00

That we can agree on the need for change does not make change inevitable. Nor does simply advocating change bring it about. Change threatens those invested in the status quo. In our country, many citizens have made plans which depend on government policies and programs now in place. Therefore, it is essential to discuss the concept of “transition,” moving from where we are today to where we want to be in a way that does the least damage.

Transition is a general approach to change. When a child is sick, he may cry at having to take medicine. Parents have a choice: stop the crying – by holding off on the medicine – or fight the illness by giving the medicine (assuming, of course, that it’s the right medicine). Over time, we have learned much about giving medicine to children. Not so long ago, most medicines either tasted awful or were administered using needles that looked and felt like instruments of torture. These days, the medicine we give to children comes in syrups and chewable pills that taste pretty good. Actually, it has become so easy that we now use too much medicine, but that’s another story.

An effective transition plan can serve the same soothing function as the sweet taste of medicine that assures that the cure is not worse than the disease. Transition is important. Even when we have come down a wrong path, we may have a lot invested in the journey. In the strategies which will follow in subsequent posts, transition plans are included as appropriate.

Chapter 8: Domestic Strategies

2009-01-23T07:56:00.001-08:00

Attaining the ten goals just listed will make us and our country more prosperous. An interesting aspect of public policy in our country is that people of various political persuasions agree on a surprising number of goals. "The devil is in the details," as many have said; in other words, disagreement is generally in the strategies to achieve those goals. That is precisely why it is so important to understand that goals and strategies are not identical. To realize our goals, we must develop successful strategies, in harmony with economic principles and the relevant axioms.

Describing a strategy as well-intentioned is to damn it with faint praise and worse; ignorance of the laws of economics is no excuse for well-intentioned policy which has no chance of success. To drive a car safely, I must know the laws of the road. To make effective public policy, I must know the laws of economics. Few of us would knowingly entrust our safety to an unlicensed driver, however, we routinely entrust decisions affecting our economic well being to untrained representatives.

How did we get into our current situation? Those who receive from government are avid voters and lobbyists. Those who pay taxes may be interested voters, but are often too busy earning a living to check the details of all legislation. Many of the people whose future is mortgaged are too young to vote. And, those who represent us in government feel that, to be re-elected, they must pay closest attention to receivers of government money, often older people, who have the best voting records.

How do we get out of this situation? You are our only hope; you need to educate yourself about freedom and how our economy works. You must exercise leadership (as a parent, teacher, and industry or government representative) based on principle. By building your equity and that of your children, and by demanding that your governments protect that equity, you will restore your country’s future.

Domestic Goals - second five (of ten)

2009-01-22T07:35:00.000-08:00

Here they are: the second set of five goals.

Goal 6: Vitalize our entry-level job market and encourage apprenticeship.

I would like my children to have a chance at a variety of jobs while young to enable them to better understand what they want in a career and how to go about getting it. If young people have good access to the job market now, I am more likely to be served by an astute, able workforce in my golden years.

Goal 7: Reduce the cost and improve the responsiveness of health care.

I appreciate quality health care at reasonable cost. I don’t consider it my right to have health-care service when and where I please, but I do appreciate having access to such care when I really need it. I also appreciate the chance to purchase health-care insurance as a safeguard against the combination of medical and financial trauma. I do appreciate the right to consult the doctor of my choice for medical care.

Goal 8: Reduce the number of wars we are involved in.

We have declared war on poverty, on drugs, and on terrorism over the last 40 years. That none of these wars is close to being won says a lot about the wisdom of launching them in the first place. While we must defend ourselves when attacked, we must carefully consider the costs and benefits of poorly-planned adventures.

“I abhor war and view it as the greatest scourge of mankind.” Thomas Jefferson

Goal 9: Energize our education system at all levels.

Education is the key to a free and prosperous society; that is the kind of society I want for my children, for their children, and for myself. Education must include basic skills such as English and foreign-language reading, writing, and speaking, and mathematics. An appreciation of history, commerce, economics, science, and the arts are also essential. Conditioning and both life and team sports are important to physical, emotional, and social well-being.

Goal 10: Remove government disincentives to business risk taking.

Progress in technology and business is the result of education, hard work, investment, experience, creativity, and risk taking. When our business climate encourages risk takers, I stand to benefit from new products that enhance my life.

Interruption: Inauguration Day

2009-01-20T21:32:00.000-08:00

I interrupt this blog to offer a few quotes from President Obama’s Inaugural Address and a few thoughts of my own. The first quote goes to the heart of my contention that people of good will often carry similar goal:

“In reaffirming the greatness of our nation, we understand that greatness is never a given. It must be earned. Our journey has never been one of short-cuts or settling for less. It has not been the path for the faint-hearted — for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk takers, the doers, the makers of things — some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.” President Barack Obama

Note that our new president shares the goals of prosperity and freedom with the vast majority of his countrymen. He also holds the strengths, or at least the potential, of the country in high regard:

“We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished.” President Barack Obama

To the cold, hard observer, the jury is not only out but has just begun deliberation on the president’s points. Societies of great spirit, education, and culture, such as China and India, are finally emerging as economic forces capable of offering their citizens a better life, but over the years, the political and economic structures of these nations have compromised the efforts of very productive people; immigrants to the USA from China and India have been among the most successful of America’s entrepreneurs. At present, our citizens bear the heavy burdens of local, state, and federal overspending. More ominous yet, an even heavier burden promises to fall on our children as the nation’s debts come due. It is difficult to foresee our own economy charging ahead unless these burdens can be lightened.

“The state of the economy calls for action, bold and swift, and we will act — not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology's wonders to raise health care's quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age.” President Barack Obama

When government decides for others what will be built, circumventing the market, there is only one guarantee, namely, that the money and resources must come from the private sector. In other words, there will be a cost. With no guarantee from the market that there will be a return – that the goods and services provided will be in demand – there is very little chance that we can avoid adding to our already considerable public spending and debt burdens. Who will decide the winners and losers in this “bold and swift” action? Will you be in the right place at the right time?

“What the cynics fail to understand is that the ground has shifted beneath them — that the stale political arguments that have consumed us for so long no longer apply.” President Barack Obama

Please count me a “cynic," but my cynicism arises from my faith in validity of the economic principles and axioms I have put forth in earlier posts rather from any political ideology (other than a faith in our Constitution).

“Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control — and that a nation cannot prosper long when it favors only the prosperous. The success of our economy has always depended not just on the size of our Gross Domestic Product, but on the reach of our prosperity; on our ability to extend opportunity to every willing heart — not out of charity, but because it is the surest route to our common good.” President Barack Obama

I submit that markets which are truly free, which allow transactions of free will between sellers and buyers, are in fact forces for good. There is no question that free markets can be compromised, undermined, violated, and devalued, and that “a watchful eye” is necessary. However, we must exercise great caution to prevent that watchful eye from destroying the very freedoms in our markets that we are trying to protect. You have already seen examples of such “eyes” in this blog. Buyers and sellers must have watchful eyes as well. While markets do reflect the times – such as shortages brought on by natural or man-made calamities – they rarely just “spin out of control.” Rather, if they are working properly, prices of certain goods and services may change rapidly; for example, the price of water may rise during a drought to lower demand and raise supply. The division of people into “prosperous” and not prosperous must be approached with great care lest we destroy prosperity for all. In our eagerness to equalize results, we may ignore critical issues – such as time spent in the workforce and equity built through patience and hard work – and inflict policies that destroy the very incentives that drive prosperity for all.

“Our challenges may be new. The instruments with which we meet them may be new. But those values upon which our success depends — hard work and honesty, courage and fair play, tolerance and curiosity, loyalty and patriotism — these things are old. These things are true. They have been the quiet force of progress throughout our history. What is demanded then is a return to these truths.” President Barack Obama

The challenges are not new. However, in fairness, I agree with this paragraph. The man is nothing if not eloquent. I wish him (and our country) wisdom, patience, and luck.

Domestic Goals - first five (of ten)

2009-01-19T07:57:00.000-08:00

Goal 1: Reduce illegal drug use and drug-related crime.

Many drugs are harmful to health and detrimental to behavior. Reducing mind-altering substance use and abuse among minors will decrease health and supervision problems among this age group and will generate fewer adult drug users. Reducing crime will reduce this heavy tax on our society and on our economy in general and will reduce the threat to me and to my family. It will eventually reduce my costs for maintaining a large prison population. Reducing crime will benefit society in general by enabling more people to make positive contributions to society.

Goal 2: Restore economic planning to individuals.

I am best placed to make decisions regarding my economic affairs and how to develop my equity. It might be in my best interest to invest all my discretionary money in common stocks. Or, perhaps I should invest all my money in preparing my children to be successful in business, thereby investing in my future indirectly. In any event, I believe that turning my money over to a third party (the government), to look after my retirement, my medical insurance, etc., is not in my best interest.

“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” Thomas Jefferson

Goal 3: Reduce poverty and homelessness.

I do not want to live in poverty; nor do I want to pay either to keep people in poverty, the result of perpetuating a culture of welfare, or to maintain them while they are there. I do not want to be homeless; nor do I appreciate the sanitation and safety problems that homeless people impose on my city.

Goal 4: Increase investment and employment.

I am more likely to find gainful employment in a vibrant economy. In such an economy, my quality of life is apt to be higher because my fellow citizens and I will have better access to goods and services. In such an economy, poverty is apt to be lower because more people have access to jobs and to markets.

Goal 5: Make home ownership more affordable

High interest rates and housing costs lower the probability that my children will be able to afford homes and leave less room in their budgets for other items if and when they are able to buy their own homes. Note: as already mentioned, interest rates remain near historic lows and housing prices continue to drop; however, both are still higher than need be and government subsidies to home owners and lenders postpone the day when homes will again be affordable to new buyers heralding renewed market stability.

Chapter 7: Domestic Goals

2009-01-18T20:31:00.000-08:00

Most public policy is formulated in the short term to respond to real or imagined needs of the moment. Witness public pronouncements of recent years: Deficits matter; deficits don't matter; use the surplus to save Social Security, because of the deficits, we can’t afford personal savings accounts, which won’t save Social Security anyway; cut taxes; raise taxes on the rich; cut health-care spending; expand health-care coverage to all; etc. Until now, these positions have been simple tests of political strength, to be reversed and reversed again as one political party or the other assumed control.

“Let us not seek the Republican answer or the Democratic answer, but the right answer. Let us not seek to fix the blame for the past. Let us accept our own responsibility for the future.” John F. Kennedy

Based on our goals to build equity in you and to bring prosperity to the country, we should be able to formulate strategies and actions that make sense for the country in the long term. We have just seen ten examples of domestic policies and programs reflecting strategies and actions that violate fundamental economic principles, making the advertised goals impossible to achieve. And, as we all are well aware, we are in the midst of a harsh economic downturn. Dissection of our domestic examples using economic principles and axioms demonstrated that worthwhile goals are not enough. We must also devise effective goal-oriented strategies and actions based on sound principles – that do not violate the underlying axioms – to achieve those goals.

It may appear obvious, but it is critical to distinguish clearly between goals and the strategies to achieve those goals. Goals represent the way we want things to be; strategies are the way we get to the goals. Once we have agreed on our goals, we can formulate strategies which make the axioms work for us rather than against us. In other words, we can use the axioms to evaluate the strategies with respect to whether or not they move us toward our goals. To be effective and to gain popular support, our strategies must account for transitions from where we are now to where we want to be.

I digress here to set a context for our goals. Ideally, my government will be as small as possible, providing only essential services. I do acknowledge that my government may sometimes need to be relatively big, for example, during time of war. In his first inaugural address, on 4 March 1801, Thomas Jefferson promised "a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government, and this is necessary to close the circle of our felicities.” [Thomas Jefferson, Writings, Autobiography, Literary Classics of the United States, Inc., New York, NY, 1984, pg. 494] In his second inaugural address, on 4 March 1805, Jefferson proudly stated that "the suppression of unnecessary offices, of useless establishments and expenses, enabled us to discontinue our internal taxes. These covering our land with officers, and opening our doors to their intrusions, had already begun that process of domiciliary vexation which, once entered, is scarcely to be restrained from reaching successively every article of produce and property.” [Thomas Jefferson, Writings, Autobiography, Literary Classics of the United States, Inc., New York, NY, 1984, pg 518]

“A government big enough to give you everything you want is big enough to take everything you have.” Barry Goldwater

I have set ten domestic goals for government designed to increase prosperity. I have written them for the society that I would like to live in and to leave to my children and their children. It would be the height of elitist arrogance to write goals for others that do not suit me. You may have concluded from the previous chapter that many of our problems arise from a need on the part of some to decide what is in the best interest of others. For example, some of your predecessors apparently felt that they and, more importantly, others needed pyramids built. I don't feel a need for pyramids, either the kind built by ancient Egyptians or the schemes built by the inventors of Social Security. In any event, I urge you to write your own goals and compare.

My ten goals and the relevant strategies are intended to be coherent; each goal has been designed to stand alone as well. One reason for this is that it is rarely possible for societies to summon the political will or energy to do, or undo, more than one important thing at a time. A second reason is that sensible, individual goals and strategies are more likely to stand the test of time. And, a third reason is that this blog is as much a description of a process as a prescribed course of action. The goals and strategies are offered as candidates for adoption, open to refinement. The same process should be applicable to any society, under any set of conditions. Having said all that, some of goals are complementary and there is synergy to be gained from meeting more than one goal at a time. The goals will follow directly; strategies to meet them are discussed in the next chapter.

“The people themselves, and not their servants, can safely reverse their own deliberate decisions.” Abraham Lincoln

Domestic policies which hurt our country: 10 - Overspending by the US Government

2009-01-16T14:43:00.000-08:00

Our federal government spends about 20% of our gross national product.

The apparent intent of overspending is to do good things for people. Government helps just about everyone, whether or not they need or want help.

Government overspending violates principle 1, “protect the equity of all citizens” by violating axiom 1C that “all government spending is a tax on the wealth of the nation” and axiom 1D, “there are three ways to pay for federal spending, taxation, borrowing, and inflation.” The weight of federal government has been so heavy on the backs of American citizens for such a long time that most of us can scarcely imagine a life without this punishing load.

Consequences: We have already discussed the harsh penalties on our private sector of 1) taxation, 2) borrowing, and 3) inflation, the three options for paying the federal government bill. We know that the national debt is a fast-growing cloud on the future of our children and grandchildren. Now, let’s look at the effect of federal government overspending on our state and local governments, where the real work of government is done.

My home state, California, raises money through an income tax. At middle income levels (single, earning more than $50,000 per year) the combined marginal federal and state tax rate is 34.3% for the tax year 2008. In other words, over 34 cents was skimmed off each extra dollar the middle-income Californian made in income tax alone. Throw in (the combined employee/employer costs of) Social Security and Medicare and he kept approximately 50 cents of that dollar. Of course, taxation does not stop there. It continues at the local level, where city sales and real-estate taxes are collected.

The state of California manages agriculture resources, water resources, recreational areas, prisons, a very extensive system of colleges and universities, and an aging complex of highways and freeways. Setting aside how well our state government is managed (hint: we’re effectively bankrupt), these are very real and necessary activities with very real, observable, and primarily positive impacts on our daily lives. We could argue that freeways should not be free, a reasonable topic for discussion, but we are past arguing about whether we will have automobiles and whether efficient highways are necessary in California; we do and they are.

Poor performance by our state government in any one of the above areas – and the list is not exhaustive – has an immediate, observable, negative impact on our lives. An encounter with a pothole at high speed can wreck your car and ruin your day. A rejection letter from an under-funded university can change your career plans.

My city of San Diego has an even more visible government, responsible for public schools, police and fire protection, a court system and local detention, parks and recreation, libraries, city streets, zoning and commercial and residential planning and inspection, sanitation, welfare, and the list goes on. This is the real work of domestic government. It is far from the phony federal Education Department, where we send more and more of our money to people far away who might send some of it back to us. City government hires, pays, and manages police officers, fire fighters, paramedics, school teachers, judges, health inspectors, librarians, trash collectors, etc., to perform critical community functions. In October of 2003, and again in October of 2007, San Diego County, along with much of Southern California, experienced a devastating series of wild fires that brought death and destruction very close to home; the performance of our city government and our firefighters was both heroic and inadequate. Since 2003, the city government has fallen into financial crisis through mismanagement and conflicts of interest. City government matters and city government is vulnerable. The loss of services is being felt directly by the people of San Diego.

People who talk about “caring” government on one hand and then insist that it happens in Washington DC have it exactly backwards. A tragedy of federal overspending that receives far too little attention is the starvation of our state and local governments, where the real work of domestic government is done by people in their own communities. A backhanded recognition of this problem in the 1970s led to a program of direct grants from the federal government to the states. I suppose that in the Alice-in-Wonderland world of federal government, this somehow made sense. Wouldn’t we all like such a deal? Here’s how it would work at our level: you send money to me; I send some of it back to you. We’re both happy, right? I get money and you get money.

“Government always finds a need for whatever money it gets.” Ronald Reagan

Very recently, this transfer of money from one sector of the economy to another has spiraled out of control with a number of actual and proposed “bailouts,” too numerous to mention. Rather than comment on all of these, I must say that any government bailout, unless it was part of a pre-arranged insurance plan, is shocking and such policies should be abandoned. Bailouts are the anti-equity, to be avoided.

“Nothing is so permanent as a temporary government program.” Milton Friedman

Recommendation: Cut federal spending by half. The philosophy that a wise and caring federal government can put our money to better use than we can is both arrogant and misguided. We need to hold federal spending within strict limits.

“It's not tyranny we desire; it's a just, limited, federal government.” Alexander Hamilton

Domestic policies which hurt our country: 9 - Failure to protect business from outrageous legal expense

2009-01-15T08:12:00.000-08:00

There is no statutory limit on awards to plaintiffs to compensate for damages by business.

The apparent intent of taking no action to protect business from lawyers or lawsuits is to protect the public from business. The message is that the way to achieve product safety is to make sure that producers pay dearly for accidents.

Outsized legal judgments violate principle 1, “protect the equity of all citizens,” by violating axiom 1B, “healthy business profits are necessary to a healthy economy.” By inflicting severe financial punishment on producers for real and imagined negligence in product design and development, we inflict real damage on our economy, often resulting in job losses.

Yes, there is a place for lawyers in our society. Lawyers and the courts provide a peaceful, though usually expensive, means for settling disputes and compensating victims when wrongs are committed. However, discretion in the settling of disputes and damages, particularly in the area of product liability, is essential because the settling of damages arising from the use of manufactured products or the provision of a service, while it may correct undesirable situations, destroys value. This is very easily seen from a trivial example: if I sue you successfully, our total net worth (yours and mine) is reduced by the court costs, if any, and the amount which the lawyers take.

Consequences: Damage awards, decided through jury trials, may bear no relationship to the actual damage suffered by the plaintiff. The reason that this can happen is that the size of the award is set by people (the jury) who are not directly affected by their own decision, a condition for sitting on the jury verified at the time of jury selection. High damage awards can have very perverse consequences, especially in cases where there is no criminal intent. There are numerous examples of how such awards discourage risk taking. The numbers of companies manufacturing vaccines has dropped dramatically as a result of high liability awards; this was brought home in the “flu-vaccine shortage” of 2004 when batches of vaccine from one of our very few remaining (foreign) suppliers were found to be contaminated. An entire industry, small aircraft manufacturing, was practically wiped out in the USA because excessive awards after several aircraft crashes (some resulting from pilot error) drove manufacturing to other countries. Profits and jobs at Corning, Inc., were destroyed by claims and awards (many of which were unsubstantiated) relative to problems with some breast implants.

There is a need in our country to distinguish criminal intent from inadvertent defective production, and vendor negligence from product misuse. Just because the manufacturer of a product is successful, product users suffering accidents should not be awarded amounts of money which are not commensurate with both the actual damage and the extent of the manufacturer’s responsibility.

“Discourage litigation. Persuade your neighbors to compromise whenever you can. As a peacemaker the lawyer has superior opportunity of being a good man. There will still be business enough.” Abraham Lincoln

The attentive reader has a question at this point: are we not against restrictions in our free market economy? Yes, definitely. But, we must again distinguish between the dog and the fleas; we must distinguish clearly between the free market defenders and flea market defenders. Individuals must have access to means of redress in our society. The courts and assistance from lawyers must be within relatively easy reach when compensation from unscrupulous or negligent producers is called for. However, such remedies are ideally corrective measures. We must take care that they do not destroy our markets.

Recommendation: limit court awards to plaintiffs to damages plus compensation, where compensation should not exceed the damage award when criminal intent has not been proven.

“The real and effectual discipline which is exercised over a workman is that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence.” Adam Smith

Domestic policies which hurt our country: 8 - Government support of labor unions

2009-01-14T07:07:00.000-08:00

Through laws and regulations, the federal government favors labor-union policies, such as wage requirements with respect to awarding government contracts, (e.g., the Davis-Bacon act) and provides protections for unions by guaranteeing the right to strike and to engage in binding arbitration.

The apparent intent of government support of labor unions is to protect workers from exploitation by employers.

Government support of labor unions violates principle 2, “protect the free market,” by violating axiom 2B, “competition is the key to higher quality and lower price.” By supporting the introduction and maintenance of a union within a private sector business, the government imposes a burden on that business. The union, by regimenting the separation between employer and employee, erects communications barriers, raises labor costs, lowers worker flexibility, limits management options, and generally raises the cost of doing business.

Government support of labor unions violates principle 3, “neither encourage bad nor discourage good economic behavior,” by violating axiom 3B, “to obtain less of something, tax it.” The more you tax work, the less work you will get. Since the tax on work – resulting from the burden imposed by labor unions – to the employer is high, he may become reluctant to hire locally and become more willing to outsource work.

Consequences: By providing a climate favorable to labor unions, government encourages their prolonged existence. This damages business and, consequently, damages workers. Some may find it reasonable to think of them, management, and us, workers. That kind of thinking, whatever merit it may have had during the early part of the 20th century in the face of large monopoly industries, is poison for business today.

In a time of upward mobility, worker empowerment, stock ownership by employees, training and retraining, spin-offs, acquisitions, entrepreneurship, and global competition, labor unions are an expensive anachronism. By bringing assignment, schedule, and wage restrictions into the workplace, labor unions constrain business decisions. Not only does this reduce the capacity of their company to compete, it shelters employees from needs and opportunities to grow, resulting in a less flexible, less capable work force. Evidence to support these assertions can be found in the loss of hundreds of thousands of jobs in strongly unionized enterprises such as steel production and ship building, and in the resulting decline of labor-union membership. In fact, we see growth in union membership only among public sector employees, where competition is absent and efficiency has not been subject to the pressures of the market. Even this is changing, as government agencies begin to outsource services to private companies.

One well-known, objectionable aspect of present-day labor unions is their propensity to spend member dues for political purposes which feature, obviously, the preservation of labor unions. This would not by itself be quite so objectionable if it were not coupled with two egregious policies, also supported by government. The first policy is the so-called closed shop. This means that to work for a certain business, you must join the union. The second policy is what the rebels who founded this country called taxation without representation. It is the use of member dues, by labor-union leaders, to support political causes without the consent of the members. Put the two policies together and you have the authority to spend money without fiduciary responsibility or liability, a breeding ground for criminal behavior.

“To compel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.” Thomas Jefferson

Today, labor unions are generally the result of an adversarial relationship between employer and employees. Businesses that use Total Quality Management or related techniques to blur the lines between employer and employee and to get all people in an enterprise working toward the same goals are generally able to avoid labor unions. In any event, labor unions are a business issue, to be addressed by the people concerned, through legal means, including negotiation. If anything, government should protect workers from coercion rather than advocate such policies as “union card check.”

Recommendation: Government should not protect labor unions or unionized companies from market forces. Government should protect business and the free market against criminal restraint of trade (by labor unions or anyone else) according to Principle 2. Government should continue to protect workers’ rights to secret ballots in deciding whether to form union a union rather than adopt a pro-union card check.

“My reading of history convinces me that most bad government results from too much government.” Thomas Jefferson

Domestic policies which hurt our country: 7 - Progressive Income Tax

2009-01-12T20:19:00.000-08:00

As yearly individual income rises, marginal personal income tax rates rise.

The apparent intent of the progressive income tax is to finance government by raising the most revenue from those who earn the most. Let “the rich” finance government since the poor can’t really afford to anyway.

The progressive income tax violates principle 1, “protect the equity of all citizens,” by violating axiom 1F, “there is a tax rate that maximizes revenue to the government.” We know this to be true because we have been through it with Arthur Laffer.

The progressive income tax violates principle 3, “neither encourage bad nor discourage good economic behavior,” by violating axiom 3B, “to obtain less of something, tax it.” The more you tax work, the less work you will get.

Consequences: If a given rate of taxation discourages work, axiom 1F tells us that a higher rate of taxation will discourage work more. Although the size and scope of the federal government must be reduced, I concede the need to raise funds to finance it. However, it is critical that we do this effectively to uphold principle 1. In general, a progressive tax penalizes work rather than wealth. Our high earners are usually people – doctors, entrepreneurs, etc. – who have invested relatively large amounts of time, energy, and emotion, have forgone earnings to obtain advanced university degrees and training, and have taken significant financial risk to realize their current earnings potential. They generally work long hours. Wealthy people, those who have already made (or inherited) their money, are motivated to find ways to protect their wealth; we have already discussed the great real-estate opportunities. Since they don’t have to work, rich people may decide to pursue such avocations as buying and selling property and effectively avoid most taxes on work income.

Money which individuals earn is rarely wasted. What do people do with the money they earn in excess of their basic life needs, so-called discretionary money? You and I invest to increase our equity in a variety of ways. A high earner may buy a house, a car, or appliances, or take a vacation. Such consumption contributes to a healthy economy. Alternatively, she may save money, increasing the nation’s capital pool for investment. Probably, she will reinvest some money in her business. A doctor or lawyer will take on partners and staff to manage a growing patient or client load. An entrepreneur will take on employees to respond to increasing customer orders. The so-called “trickle-down” ideas, put forth in the 1980s, said that when business is healthy, everyone benefits. While the trickle-down theory may have temporarily fallen from favor, Axiom 1B (“healthy business profits are necessary to a healthy economy”) tells us that it is still true – taking money from our strongest businesses, our best entrepreneurs, and our hardest workers hurts us all.

Three things happen when higher tax rates skim off this discretionary money. First, less money is available in the private economy for consumption, savings, and expansion. Second, the most energetic and creative people in our society have less incentive to work harder or longer since the more they make, the higher percentage the government takes. And third, high earners start putting more energy into sheltering their money from taxes, and less energy into productive work. The second and third points illustrate the irony of this flawed policy: raising marginal tax rates destroys incentives to earn and increases incentives to shelter money from taxes. These rational choices shrink the tax base. Therefore as Arthur Laffer predicts, high marginal tax rates actually decrease revenues to the government.

“It will be of little avail to the people that the laws are made by men of their own choice if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood.” James Madison

Recommendation: replace the progressive income tax with a flat tax. This will be discussed further in a future post.

“I would like to electrocute everyone who uses the word "fair" in connection with income tax policies.” William F. Buckley, Jr.

Domestic policies which hurt our country: 6 - Drug Prohibition

2009-01-12T08:01:00.000-08:00

No private citizen may buy or sell certain controlled substances, for example cocaine, heroine, and marijuana. “On December 28, 1992, ABC Television aired a major special on the drug war in Bolivia which, according to the Bush Administration, is our ‘best hope’ for winning the drug war in South America… The first American anti-drug law was an 1875 San Francisco ordinance which outlawed the smoking of opium in opium dens. It was passed because of the fear that Chinese men were luring white women to their ‘ruin’ in opium dens. ‘Ruin’ was defined as associating with Chinese men. It was followed by other similar laws… The Harrison Act which ‘outlawed’ these drugs was, on its face, a simple licensing law which simply required sellers to get a license if they were going to handle the opiates and cocaine… it is doubtful that very many members of Congress would have thought that they were passing … a general drug prohibition. The law even contained a provision that nothing in the law would prohibit doctors from prescribing these drugs in the legitimate practice of medicine… Marijuana was outlawed in 1937 as a repressive measure against Mexican workers who crossed the border seeking jobs during the Depression… All illegal drugs combined kill about… one percent of the number killed by alcohol and tobacco. Tobacco kills more people each year than all of the people killed by all of the illegal drugs in the last century.”

The apparent intent of drug prohibition is to keep dangerous drugs away from citizens. It is understood that just passing a law is not enough to govern behavior; the will and the capacity to enforce the law must be present.

Drug prohibition violates principle 2, “protect the free market,” by violating axiom 2C, “monopolies raise prices and lower quality.” The monopoly in the sale of prohibited drugs is enforced by those willing to risk legal penalties and able to restrain competition by force. The monopoly has become an oligopoly, dominated by a relatively small number of sellers, most of whom are outside the United States. However, the major market remains the USA.

Consequences: Prohibition of drug use is effectively a replay of the prohibition of alcohol use in the 1920s; fortunately, a chastened congress used the 22nd amendment to repeal the 19th. By making the sale of certain substances illegal, an effective monopoly is created. As we know, a monopoly raises the price of the desired goods. The demand for certain narcotics can be induced by supplying initial quantities at below street value until emotional or physical dependency occurs, after which, full price is demanded.

“Government's first duty is to protect the people, not run their lives.” Ronald Reagan

Current policy has created two classes of criminals, sellers and users. Sellers reinvest their profits to grow the business. High costs often drive users to more desperate crimes to maintain habits. High profits maintain supply and emotional or physical addiction maintains demand. High profits also increase the attraction of selling drugs. This attracts competitors, but since the activity is illegal, it is also unregulated. Therefore, elimination of the competition is accomplished by means not normally associated with legitimate business: violence; murder; and mayhem. Families are ripped apart and Innocent victims are commonplace.

“The only power any government has is the power to crack down on criminals. Well, when there aren't enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws.” Ayn Rand

Am I against the use of addictive and dangerous drugs and the resulting pointless destruction of mind and body, not to mention equity? Yes (see Equity Destroyers in Section 1, above). Do I think that our federal government can reduce this tragic waste through prohibition? No. This is very hard for many people with good intentions to accept. The vast majority of our citizenry would like to subdue this plague on our society. Unfortunately, just passing laws and turning the problem over to the police won’t solve it. In fact, I hope you have learned here that when we violate our principles and axioms, we make a bad situation worse. In the chapter on strategies, I will propose success-oriented approaches to the problems created by the prevalence and use of addictive and dangerous drugs.

The size of our economy has made us a demand center for controlled substances. We are the drug market of choice, and a very lucrative one, for producers and distributors from other countries. This has had the effects of financing important criminal organizations in such countries as Afghanistan, Columbia, and Mexico, of making it highly profitable to violate our national borders, and of financing terrorists. In post-11-September-2001 USA, these side effects threaten our national security.

By making drug use illegal, we appeal to the rebelliousness of our children, to do precisely those things that adults say are dangerous and illegal. Drug use, practiced with any frequency, can lead to addiction. Once hooked, an addict must raise money to support his or her habit. There are two approaches for those who do not already have access to enough money: they can become sellers; or they can steal. In the war on drugs, we have created more enemies (criminals) than we can handle. We hunt them, track them, catch them – we use police cars instead of tanks and planes – and try them. When we find them guilty, we make them prisoners, prisoners of (the drug) war. Then, for good measure, we throw some automatic sentencing, a three-strikes law, into the mix, to keep our new enemies in prison as long as we want.

Making drugs illegal removes production and sale from the visible economy and artificially limits both legitimate supply and suppliers. This opens the way to gang takeover of the business because organized gangs can create monopolies, through the use of force, far more effectively than any individuals. The business is lucrative because restricted supply and the danger of arrest keep prices high; as we know already, addiction maintains demand.

“Even if one takes every reefer madness allegation of the prohibitionists at face value, marijuana prohibition has done far more harm to far more people than marijuana ever could.” William F. Buckley, Jr.

Bad policies often work well together. We continue to package drug prohibition with the minimum wage. First, we make it illegal for the unskilled to work at productive jobs. Then, we create an irresistible opportunity to work in the underground, tax-exempt economy, selling narcotics for important sums of money. Even those who might otherwise be reluctant can hardly pass it up, since it is illegal for them to work for lower pay anyway and since no experience is necessary in the drug trade. This combination of bad laws has laid more than one young unskilled person very low.

Other facts that might interest you: “The cost to put a single drug dealer in jail is about $450,000… [In 2004], one-fourth of all of the young black men in America [were] either in prison or on parole. Most of them were arrested on non-violent drug charges.” The accumulation of thousands of minority males in prison should be a red flag to all of us; the war on drugs is a real war, with many casualties.

“The best way to get a bad law repealed is to enforce it strictly.” Abraham Lincoln

Recommendation: End the war on drugs, the sooner the better. Use some of the money saved to help drug addicts take back their lives.

“Most of the harm that comes from drugs is because they are illegal.” Milton Friedman

Domestic policies which hurt our country: 5 - Federal Aid to Education

2009-01-11T07:37:00.000-08:00

A separate Federal Department of Education was established (from what was formerly part of the Department of Health, Education, and Welfare) and the federal government spends money on education at all levels. President Jimmy Carter signed the bill creating the Federal Department of Education in 1979. In 2008, the federal budget for education exceeded $68 billion. The apparent intent of establishing the Department of Education was to raise the quality of education across the USA.

Establishing a Federal Department of Education violates principle 1, “protect the equity of all citizens,” by violating axioms 1C, “all government spending is a tax on the wealth of the nation” and 1E, “transferring money costs money.”

Establishing a Federal Department of Education violates principle 2, “protect the free market,” by violating axiom 2C, “monopolies raise prices and lower quality.” This is a kind of “religious tax;” our money is used to support a touching faith, that activity at the federal level somehow benefits education at the local level.

Consequences: Transferring money costs money. The foolishness of this policy is best illustrated by a very simple question: when you send your children down the street to school, how do you benefit from sending your education tax dollars to Washington DC? Our local schools desperately need money for everything: books; physical plant; computer equipment; and salaries for excellent teachers. What they do not need are additional rules and regulations from educrats far away. For example, current policies – such as the no child left behind act – to educate by examination, will continue to be proven ineffective, but not before billions of dollars in tax money are wasted. Worse, schools that don’t comply with the guidelines may lose their money. The most efficient way to fund schools is directly.

The direct approach is true in general. Consider the home-schooling trend. More than ever, concerned parents are educating their children in their own homes. However, you don’t have to home-school your children to appreciate the high value of parental interest and support. Even among children in public schools, the highest achievers are generally those who receive the most encouragement and reinforcement at home.

The justification for the assertion that Federal aid to education violates axiom 2C is that while the Federal government does not run the schools, it does make first claim on more than $68 billion which is intended for education. In other words, by the time the public schools claim the money they need, the federal government already has theirs, rain or shine, positive impact or negative impact; axiom 2C predicts the latter.

Recommendation: The misguided creation of a Federal Department of Education raises a more general point. Excess federal spending starves not only the private sector. It also starves state and local governments where most of the real work of government – education is a prime example – is done. The Department of Education should be eliminated and federal aid to education should be stopped outright; no transition strategy is required.

Domestic policies which hurt our country: 4 - Rewarding Home Buyers and Owners

2009-01-09T07:32:00.000-08:00

Because home ownership is seen by many as a key to family and neighborhood stability and prosperity, the government rewards home buyers, owners, and sellers in these ways: points to finance home loans are tax deductible; home-mortgage interest payments are tax deductible; and capital gains on most home sales are no longer taxed. In addition, to make the issuance of debt attractive to lenders, the government chartered two secondary market corporations, the Federal National Mortgage Association (aka “Fannie Mae”), and the Federal Home Mortgage Corporation (aka “Freddie Mac”). Although Fannie and Freddie are public corporations, they are backed by the federal government.

“The CRA [Community Reinvestment Act, 1977] requires that each insured depository institution's record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution's application for deposit facilities, including mergers and acquisitions.” Although the Federal Reserve finally issued guidelines, more than thirty years later, that loans could not be written for any person who did not have proof that they could make the payments, the CRA had long been influencing lenders to make mortgages available without such proof.

The apparent intent of rewarding home buyers and owners is to subsidize borrowing to make it easier to buy a home. Since the housing market is an important component of the economy, making it easy and profitable to buy and sell homes helps the economy. The apparent intent of chartering and backing two corporations to repurchase mortgage debt is to assure an unlimited supply of credit.

Rewarding borrowing violates principle 1, “protect the equity of all citizens,” by violating axiom 1A, “equity financing is desirable.” Even if you have built equity in your home, the excessive debt of others can directly threaten that equity. As we have seen in 2007 and 2008, unwinding excessive debt can dramatically lower the market value of all homes with a consequent negative impact on your equity which manifests itself when you sell your home.

Rewarding borrowing violates principle 3, “neither encourage bad nor discourage good economic behavior,” by violating axiom 3A, “to obtain more of something, subsidize it,” debt in this case.
Government backing of Fannie Mae and Freddie Mac also violates axiom 3A in that implied backing of their debt is also a subsidy. This “full-court-press” encouragement of bad economic behavior, the pursuit of debt, runs directly counter to our goal of increasing equity. You may say that using the leverage of debt is one way to build large equity positions; but that will be true only in times of home-price inflation. As we have seen in 2007 and 2008, leverage operates quite differently in an environment where home prices are declining. For most people, this means putting at risk their single most important investment, their home.

Consequences: The subsidies provided by tax deductibility of home-mortgage costs (points) and interest payments act to raise both the amount and the cost of debt; this may not seem important in 2008 when mortgage-interest rates remain near historic lows, but home-mortgage-interest rates are higher than they would be if they were not subsidized. The low cost and high availability of debt and the availability of homes for little or no money down drove home prices higher in recent years.

The upside-down, backwards policy of subsidizing borrowing hurts young people in two ways: first, artificially high prices made it (and continue to make it) nearly impossible for some to buy their first home; and second, low-income families are hurt by higher interest rates – the benefit of home-mortgage tax deductibility flows to high-income home owners who pay almost all of the income taxes in the country at present. These policies, still in place, continue to artificially raise the demand for home loans. And although housing prices are now falling and credit markets are tight, debt subsidies will maintain the demand for debt and postpone the day when new buyers can afford to buy a home and new construction begins again.

Ironically, some politicians are telling us that it is now necessary to “stabilize” home prices in order to get the housing industry moving again. They propose to do this through still more debt rather than clearing the way for home prices to fall to the point that first time buyers can afford to enter the market. This will eventually happen, with or without delays imposed by frantic politicians, but it is possible to prolong the agony.

Deductibility of home-mortgage interest keeps the federal government from collecting taxes appropriate to the subsidized buyer’s tax bracket. This is a case of economic inefficiency, higher home costs and lower government revenues, rather than a moral issue. Homeowners are smart enough to realize that, for them, this is a subsidy on all debt; until the credit squeeze of 2008, they were refinancing their home mortgages or opening equity lines of credit instead of taking on debt that would not otherwise be subsidized. Tax deductibility of home-mortgage interest is a special case of a more general economic distortion; tax deductions are subsidies from one group, taxpayers in general, to a special-interest group, to promote taking on debt.

The other major subsidy, which has emerged in recent years, makes capital gains on most home sales safe from taxation. While needless government intervention and taxation are destructive, subsidies which violate tax neutrality can also be damaging. Since it is not taxed, the capital gain from the sale of a home is now almost twice as valuable for many as the same amount earned through work. The over protection of income from home sales and under-protection of income from work benefits the older home owner and penalizes the young worker. Politicians who say that we must tax the rich miss the point that the rich got that way and stay that way by avoiding taxes; even today, many smart rich folks (there are few dim ones) emphasize income from real estate over that from traditional (taxable) work.

During the past year, the unraveling of artificially inflated home prices has caught some young homebuyers in a different kind of trap. Persuaded that home prices would continue to rise and that the only hope for ownership was to buy as soon as possible, many took loans which they could only afford to service at so-called sub-prime rates, introductory rates to allow them into the home market; backed by Fannie Mae and Freddie Mac and a host of investors looking for “sure things,” banks were complicit in this process by failing to qualify borrowers.

Unfortunately, a general rise in interest rates caused a rise in the variable rate of interest on mortgages; the monthly bills of some new homeowners rose beyond their ability to pay. Since mortgage loans are the driver of home sales, the increase in rates reversed the rise in home prices which in turn led to a loss of equity. In many cases, so-called “homeowners” now carry mortgages greater than the market value of their homes (the downside of leverage); it’s difficult to see how having no equity equates to ownership. Speculation will continue to occur with or without government. However, the government subsidy to homeowners has unnecessarily distorted an important private market and caught young workers and their families in a double bind.

Recommendation: End the deductibility of home mortgage interest payments. To do that effectively, we need an effective transition strategy (a phase out) because elimination of home-mortgage deductibility might cause some short-term hardship. Dissolve Fannie Mae and Freddie Mac; this will encourage banks and financial institutions to offer mortgages which they intend to keep, backed by the collateral of a properly appraised home, the presence of a significant down payment (for example, 20% or more), and a sober evaluation of the borrower’s ability to make the monthly payments. There is no need for the federal government to be involved in the mortgage market. “What are the origins of Freddie Mac and Fannie Mae,” by Rob Alford, is a must read for anyone interested in this subject.

Domestic policies which hurt our country: 3 - Subsidies to Medical Care

2009-01-08T07:38:00.000-08:00

Employer subsidies to employee health care are tax deductible. The government provides medical insurance to retirees through Medicare. The subsidies began during World War II as part of a federal government effort to hold down labor rates in order to keep costs for the war as low as possible. Unfortunately, when the war ended, the subsidies did not. Medicare was signed into law in 1965 by President Lyndon Johnson as part of his “Great Society.” [Wells, Wyatt, American Capitalism, 1945-2000, Ivan R Dee, Chicago, 2003, pg. 60] If you work for someone else, your payroll tax rate for Medicare is 1.45%; your employer pays a matching amount. Likewise, if you are self-employed, you pay Medicare tax at a 2.9% rate. All Americans are eligible for Medicare at age 65; earlier if they are disabled.

The apparent intent of subsidies to medical care is to assure quality health care for all citizens. After all, if they are not insured through their employer, aren’t most people too naïve or irresponsible to find medical insurance on their own? And since people are automatically poor and unhealthy when they get older, don’t we need a federal government program such as Medicare to take care of them?

Medical subsidies violate principle 1, “protect the equity of all citizens,” by violating axiom 1C, “all government spending is a tax on the wealth of a nation,” and by violating axiom 1E, “transferring money costs money.” Medicare effectively opens the taxpayer’s checkbook to finance a monopolistic (inefficient), open-ended (costly) approach to financing health care for our senior citizens.

Medical subsidies violate principle 2, “protect the free market,” by violating axiom 2C, “monopolies raise prices and lower quality.” Through Medicare, the federal government has established itself as the primary insurer of retired people. This medical care monopoly shields older citizens from the benefits of an efficient market for insurance. Not all people, even those over 65, need identical medical coverage.

Medical subsidies violate principle 3, “neither encourage bad nor discourage good economic behavior,” by violating axiom 3A, “to obtain more of something, subsidize it,” and by violating axiom 3B, “to obtain less of something, tax it.” Medical subsidies are a tax on work and a tax on hiring and we can expect less work and less hiring. From the employee perspective, once the taxes are collected and disconnected from the cost of services, any medical services are effectively subsidized by the employer or by the federal government. The result is a higher demand for medical services and a resulting higher cost. Medicare violates axiom 3C, “in general, money is best left in the hands of private citizens.”

Consequences: As in the case of Social Security, the taxes to finance Medicare burden work and raise the cost of hiring. The government has become a monopolistic insurer for retirees. However, since retirees do not pay the premiums, their health care is subsidized; the cost to those who do pay is virtually unrestrained (like working people turning over their credit cards to retirees). In the case of subsidized health insurance, companies have their tax deductions to protect – at the same time, they have strong incentives to reduce the cost (and quality) of care to employees. In addition, most private companies are unwilling, untrained recruits to the health-care-provider community; their participation lowers the efficiency of that community.

Medicare – along with Social Security and retirement savings schemes, such as IRAs and 401(k)s – is another example of the high esteem in which we and our government hold the “false god” of retirement.

Higher cost and lower quality of service: these are the results we would naturally expect from government intervention into doctor-patient relationships. As the artificially constrained costs begin to change the face of these relationships – now controlled through managed care, HMOs, etc. – we are beginning to see severe disincentives to young people considering careers in medicine. High entry costs and diminished prospective returns will lower the quality of our medical practitioners and their services.

But, don’t we all need insurance? I want it and I believe that all but the very wealthy would be wise to have it; but I know that we don’t all need exactly the same coverage. Given the freedom, the private sector has been capable of devising insurance plans suited to individuals. If I purchase only the insurance I really need and seek minor medical care at my own expense and only when necessary, I expect my medical costs to be lower than under a subsidized system. And, why should my employer be in the medical insurance business? I do not buy my automobile or home insurance through my employer. Why can’t he just pay me, in real money, the total amount that I am worth and let me buy my own insurance? Then, my decision to retain or change my job would not be influenced by medical insurance, and vice versa. From the extra money I earn, I could pay for health insurance suited to my own needs.

How can we be sure that insurance companies will pay for our care? Market forces are our first, best guarantee. Companies which don’t provide quality service do not survive in the competitive environment of the free market; naturally, we owe it to ourselves to shop for value and quality in anything we buy, especially something as important as insurance. But, even assuming some desirable level of government regulation, there is a big difference between monitoring an industry and taking it over. It is the difference between protecting the free-enterprise system and government intervention in that system.

Government restrictions are based on the concept of equalizing access for everyone, regardless of ability to pay; but, remember how well that worked in the Soviet Union – everyone had equal access to very little. Our government is equally incapable of improving on the free market. A far better approach is to equalize access to insurance rather than subsidizing people in larger companies. My guess is that if Medicare were cancelled and 5% of the money, now being channeled through our federal government was spent directly by seniors on prevention, quality of life and life expectancies in this country would increase.

Recommendation: We would do ourselves a very big favor by getting the federal government out of the medical insurance business. Does advocating a return to market-based health care mean turning senior citizens dependent on Medicare out into the streets to suffer and die? Obviously this is a facetious question, but you may hear such talk from people anxious to preserve a major role for government and to prevent correction of a very costly mistake. What is needed here, as for Social Security, is an effective transition strategy (coming soon to a blog near you).

“It is amazing that people who think we cannot afford to pay for doctors, hospitals, and medication somehow think that we can afford to pay for doctors, hospitals, medication and a government bureaucracy to administer it.” Thomas Sowell

Domestic policies which hurt our country: 2 - The Minimum Wage

2009-01-07T07:38:00.000-08:00

All employers, public and private, will pay employees at least a specified minimum hourly wage. The Fair Labor Standards Act of 1938, which applied “generally to employees engaged in interstate commerce or in the production of goods for interstate commerce” set the first minimum wage at $0.25 per hour. Amended in 1961 to extend “coverage primarily to employees in large retail and service enterprises as well as to local transit, construction, and gasoline service station employees,” and again in 1966 to “federal state and local government employees” and just about all others who were not self-employed, the federal minimum wage has risen over the years. On 24 May 2007, President George W. Bush signed a bill raising the minimum wage in three steps, to $5.85, $6.55, and $7.25 in July 2007, 2008, and 2009 respectively.

The apparent intent of the Minimum Wage is to provide a living wage for all workers. Supporters of the minimum wage assume that the natural market tension between employees and employers – employees will take as much money as they can get and employers will pay as little as they can get away with – must be resolved by a law. The minimum-wage law might appear to favor employees by compelling employers to pay them at least a certain amount. Now let’s see why the minimum wage cannot satisfy the apparent intent.

The Minimum Wage violates principle 1, “protect the equity of all citizens,” by violating Axiom 1B, “healthy business profits are necessary to a healthy economy.” When business overpays for anything, materials, advertising, or labor, its profits are adversely affected. By artificially inflating labor costs, the Minimum Wage reduces business profits endangering the business. One reason that this is dangerous is that the law cannot possibly affect all competitors equally. For example, those who can easily move labor costs out of the country may be able to avoid the most pernicious effects of the law.

The Minimum Wage violates Principle 2, “protect the free market,” by violating axiom 2A, “price brings supply and demand into balance” and by violating axiom 2D, “government regulation introduces inefficiencies into markets.” In a free economy, labor supply and demand are brought into balance through price (wages). When we artificially restrict the movement of price, in this case by establishing a “floor” under which wages cannot fall, we set a higher-than-market price on labor at the low end of the capability scale. The result is a reduced demand for so-called “unskilled” or “semi-skilled” labor. Therefore, the Minimum Wage represents government intervention in the free market for labor.

An understanding of the applicable axioms allows us to predict the outcomes of this policy. Case 1: without price flexibility, an employer only contracts for labor that is worth the minimum wage or better to him. Case 2: even though a job is worth less than minimum wage, a law-abiding employer ignores this, hires anyway, and pays the inflated wage, thereby reducing his profits accordingly. Case 3: an employer pays less than minimum wage and is, by definition, a criminal.
In the first case, high-risk, entry-level workers with few marketable skills are left behind. This effect strikes hardest in our poorest, urban neighborhoods where young people are desperate for jobs. Because of the minimum wage and the relatively high risk to employers of hiring those who have never held a steady job, the jobs just never appear. The impulse to bring on an “apprentice” at a very low wage is stifled. This creates a cruel dilemma for the unemployed: they need experience to get high-paying jobs, or in this case, minimum-wage jobs; but, they need jobs to gain experience. Some have equated the minimum wage to “sawing the bottom rungs off of the job ladder.” As often happens, our government responds to a problem created by government with another government program. In the case of unemployment due to a lack of skills, government tends to create expensive, irrelevant job-training programs (relevant job-training occurs on real jobs). The minimum wage is “anti-young and anti-poor.”

In the second case, higher operating expenses and lower profits curtail expansion and may force businesses to close or seek alternatives elsewhere. We see this in so-called “outsourcing,” where jobs that cannot command minimum wage are simply exported to other countries. This “outsourcing,” while it may help a small company survive, fragments the company in ways that often result in inefficiencies. When some workers are paid more than they are worth, the employer may be unable to afford to hire or retain superior workers. This consequence is most unfortunate since an excellent, highly-motivated worker can often inspire an enterprise to higher productivity and profit.

In the third case, we drive part of our economy “underground.” Family-owned businesses may choose to hire only family members, relatives, or close friends, often “unofficially,” closing off expansion and job opportunities to others. This may limit growth (except where families are extremely large). And of course, we have the occasional raid by the “minimum-wage police” to deal with. That’s when employer and employee alike are treated as criminals (which, technically, they are under this law). More typically, the law is not enforced unless there are complaints, breeding a diminished respect for this law and laws in general.

One irony of this misguided policy is that the minimum wage is not really a “living wage.” Rather, it is an arbitrarily-set, entry wage. Most workers, given the chance, move relatively quickly beyond their entry-level skills and wages. As they acquire on-the-job training, the market value of their skills rises. If their current employers won’t raise their salaries, the competition often will.

Consequences: The minimum wage hurts people trying to get a start in the job market, particularly the young and those with minimal education. A further irony is that many young people, when they first enter the job market, would be happy to find jobs at any wage, since they still live with their parents and have relatively few responsibilities.

To appreciate just how ridiculous the minimum wage is, consider a simple example. Suppose that you can afford to pay $5 to have your lawn mowed and that I agree to do it at that price. Just as we are concluding our agreement, someone from the government arrives to explain that it is illegal for me to mow your lawn for less than $10. So, no deal! You don’t get your lawn mowed and I don’t earn $5; a “lose-lose” proposition. By the way, if a $10 minimum for lawn mowing is good, why wouldn’t a $15 or a $20 minimum be better? If excluding some entry-level workers is good, why not exclude more?

Recommendation: The Minimum Wage, arbitrarily set by someone (the government) who knows absolutely nothing about you, your age, your responsibilities, your abilities and disabilities, your experience, your criminal record, your need for work, the work that you would be doing, how far you have to travel to work, your employer, or your other options, is public policy at its very worst. It is effectively a law against working, and serves as an example of government intervention in the free-enterprise system and a costly loss of freedom and opportunity for young people. It should be repealed.

“The real minimum wage is zero.” Thomas Sowell

Domestic policies which hurt our country: 1 - Social Security

2009-01-06T08:43:00.000-08:00

Employer and employee pay a tax on the employee’s salary. Funds collected by the government are then distributed to current retirees. If you work for someone else, “Social Security payroll taxes are collected under authority of the Federal Insurance Contributions Act (FICA). The payroll taxes are sometimes even called ‘FICA taxes.’” The FICA tax rate of 6.2% is applied to the first $102,000 of your income; your employer pays a matching amount. “For the first $102,000 in FICA taxable earnings [you pay] $6,324.00.” [Social Security (FICA) tax for employees] Likewise, if you are self-employed, you pay social-security tax at a 12.4% rate on your first $102,000 of income.

The Social Security Act was signed into law in 1935 by President Franklin Roosevelt. Beginning in 1937, payroll taxes at 2% of income were collected and then transferred to retirees. Workers in the system are eligible to retire with full benefits at age 65 or with reduced benefits at age 62. Over the years, new retirees and cost of living raises to retirees have raised unfunded pension liabilities to about $20 Trillion despite ever-increasing payroll taxes. [U.S. Department of Labor website]

The apparent intent of Social Security is to provide some level of support for retirees. Since so many people fail to provide for their own retirement, it naturally falls to government to assure that people will not be destitute in their golden years. Since older people often fall into poverty and since government is morally obligated to care for them anyway, isn’t it better to have government intervene before the problem arises?

Social Security violates principle 1, “protect the equity of all citizens,” by violating axiom 1E, “Transferring money costs money.” Implementation of Social Security is carried out by the Social Security Administration. “The agency includes 10 regional offices, 8 processing centers, approximately 1300 field offices, and 37 Teleservice Centers. As of 2007, about 62,000 people were employed by the SSA.” [Social Security Reform Center]

Social Security violates principle 2, “protect the free market,” by violating axiom 2C, “monopolies raise prices and lower quality.” Social Security gives the federal government a retirement-fund monopoly because the law gives the federal government first claim on your retirement money (the FICA taxes). Yes, you can make after-Federal-Insurance-Contribution provisions, but the only place your FICA taxes can go is to the federal government. As for any monopoly, you are highly unlikely to experience the quality of service that competition would bring. You are far more likely to experience feverish attempts by nervous politicians to preserve the monopoly.

Social Security violates principle 3, “neither encourage bad nor discourage good economic behavior,” by violating axiom 3A, “to obtain less of something, tax it,” and, to a lesser extent, axiom 3B, “to obtain more of something, subsidize it.” Social Security is a tax on work and a tax on hiring. If your net return for working is reduced, you are less likely to work. And if it costs you more to provide for an employee, you are less likely to hire her. To receive the full measure of Social Security to which you are entitled, you cannot be receiving income from work; this means that Social Security is a retirement subsidy, a tribute to that “false god.” Social Security also violates axiom 3C, “in general, money is best left in the hands of private citizens.”

Consequences: Social security is a program to transfer money from younger people to older people, from people who are working to people who are not. It is a tax on work and on hiring, and therefore burdens the former and reduces the latter. It is a retirement subsidy and therefore encourages retirement. It represents a government monopoly of part of the retirement market – immune to competition since the government merely takes the money – with the expected high price and low quality of returns. It imposes a heavy burden on workers and their families while providing diminishing benefit to retirees.

But, isn’t it right for retirees to receive the money that they put in? The first retirees into the program during the Great Depression never paid, they only received. Since then, retirees, as a group, have been receiving more than they put in. As the demographics of the postwar baby boom play out, future recipients can expect to receive less than they put in. If taxes are raised even higher to change this equation, the children and grandchildren of these retirees are likely to be impoverished.

But, doesn’t social security show that we care about our retirees? Hardly; it is a system created by government for government based on the elitist principle that you are incapable of planning and investing for your own retirement. You are required to use your money, money that you could be investing to build your own equity, to finance someone else’s retirement. And, if you are real lucky, someone else will finance your retirement later. Of course, you will now be dependent on the government to send you back your money. Social-Security taxes reduce your incentive and your ability to save and invest, thereby reducing the national pool of capital and destroying jobs.

“Today there are about 40 million retirees receiving benefits; by the time all the baby boomers have retired, there will be more than 72 million retirees drawing Social Security benefits.” Tony Snow

But, isn’t the government smarter than we are, knowing that if they don’t collect the money now, they will have to pay for our retirement later at a higher price? This patronizing attitude offers insight into a deeper problem. As I mentioned in chapter 1, retirement is a “false god” which we have been conditioned to worship and which our government exploits to extremes. Retirement is the “Emerald City” to which all careers, jobs, life plans, and savings lead. We work all our lives, stay with the same job, keep the same pension plan, invest in IRAs and 401(k)s, pay taxes to Social Security and Medicare, and make our plans for the day we retire. Why? Of course we lose capability as we age, and of course there may come a day when we may reduce our work hours or stop working altogether, but we have allowed the government to take many thousands of dollars from us to appease the “retirement god,” money that could have been well invested during the prime years of our lives to build equity. The fear that we will not have enough money to retire at the magic age has allowed us to fall into the Social Security trap which ironically assures that we will invest less and have less during the course of our pre-retirement lives and wind up with less when we do retire.

“The real sin with Social Security is that it's a long-term rip-off and a short-term scam.” Tony Snow

Recommendation: The Social Security Program should be eliminated. This system is sick. One note of caution: before telling grandma that we plan to end Social Security, and she collapses of a heart attack from the idea that her only means of support might be terminated, please wait for a future section where I will discuss the need for an effective transition strategy to end inefficient programs like Social Security, where so many have been promised so much. In his call to end Social Security, Ron Paul proposed that young people be able to simply “opt out” of the system. In the long run, this would reduce the level of unfunded liabilities.

“Sometimes it is said that man cannot be trusted with the government of himself. Can he then be trusted with the government of others?” Thomas Jefferson

Chapter 6: Domestic policies which hurt our country

2009-01-05T11:01:00.000-08:00

Earlier blogs (and chapters) offer the principles and define the axioms that must be respected if our public policies are to be consistent with the principles. I have chosen ten examples of current domestic policies and programs that violate our principles and hurt our country. Following a brief description and background, each example will be described in the days to come with respect to four aspects. Under apparent intent, I will speculate on what results the architects of the policy or program might have wanted us to expect. Since none of these policies or programs were simply temporary measures, each will be examined strictly on its merits, with little regard to the times or social climate in which they were born. Under principles and axioms violated, I will bring us “back to reality” to show why the policy or program never really had a chance of working for us in the first place in any climate. Under consequences, I will describe the observable effects of the policy or program. And finally, under recommendation, I will say what I think we should do about the policy.

“Facts do not speak for themselves. They speak for or against competing theories. Facts divorced from theories or visions are mere isolated curiosities.” Thomas Sowell

Economic Principles and Axioms: Summary

2009-01-02T07:29:00.000-08:00

Principles of good governance and relevant economic axioms, from my previous posts, are listed below without comment.

Principle 1: Protect the equity of all citizens.
Axiom 1A. Equity financing is desirable.
Axiom 1B. Healthy business profits are necessary to a healthy economy.
Axiom 1C. All government spending is a tax on the wealth of a nation.
Axiom 1D. There are 3 ways to pay for federal spending: taxation; borrowing; and inflation.
Axiom 1E. Transferring money costs money.
Axiom 1F. There is a tax rate that maximizes revenue to the government.

Principle 2: Protect the free market.
Axiom 2A. Price brings supply and demand into balance.
Axiom 2B. Competition is the key to higher quality and lower price.
Axiom 2C. Monopolies raise prices and lower quality.
Axiom 2D. Government regulation introduces inefficiency into markets.

Principle 3: Neither encourage bad nor discourage good economic behavior.
Axiom 3A. To obtain more of something, subsidize it.
Axiom 3B. To obtain less of something, tax it.
Axiom 3C. In general, money is best left in the hands of private citizens.

Principle 4: Be consistent at home and abroad
Axiom 4A. The wealth of a nation is measured by the wealth of its citizens.
Axiom 4B. Unobstructed, labor will move to capital and capital to labor.
Axiom 4C. Free trade enriches those who practice it.

Principle 4 continued (with Axioms 4B and 4C)

2009-01-01T20:47:00.000-08:00

Axiom 4B. Unobstructed, labor will move to capital and capital to labor

This axiom says that there is a natural tendency for people to move to where there is work – that is to where they can earn a living – such as to agricultural fields and crops, to large construction projects, to mines, and since the industrial revolution, to urban areas in general. It says that businesses tend to set up shop where there is an appropriate labor pool and markets; it is likely that a research laboratory will choose to be near a University, a sandwich deli near offices and stores, and a supermarket near a residential district. The axiom also says that obstructions such as borders, fences, taxes, and unionism can impede this free flow; this is likely to frustrate people and cause economic inefficiencies.

“The philosophy of protectionism is a philosophy of war.” Ludwig von Mises

Axiom 4C. Free trade enriches those who practice it

Tariffs, boycotts, subsidies, and demands – external to the transactions – on trading partners are examples of restrictions on trade. Practicing free trade – except in cases where national security may be endangered, such as commerce in weapons of war – benefits us for two reasons: first, our goods and services find expanded markets; and second, the goods and services from other our trading partners add to the healthy competition which raises quality, lowers price, and benefits consumers.

“Tariffs that save jobs in the steel industry mean higher steel prices, which in turn means fewer sales of American steel products around the world and losses of far more jobs than are saved.” Thomas Sowell

Principle 4: Be consistent, at home and abroad (with Axiom 4A)

2008-12-31T08:40:00.000-08:00

Americans are often reluctant to apply principles abroad that work well at home. While some of us still reserve a healthy degree of caution when dealing with our own government, our generosity towards the governments of other countries often seems boundless. As evidence, witness the number of dictators enriched at US taxpayer expense. Notice also the armies of small countries whose primary role is to suppress their own people and to keep autocratic governments in power. Restraining payments to such governments would make American foreign policy more efficient and move it to higher moral ground.

Axiom 4A. The wealth of a nation is measured by the wealth of its citizens.

Philippine President Marcos, the Shah of Iran, Zairian President Mobutu, and Palestinian leader Arafat are examples of authoritarian rulers who diverted money, intended for or belonging to the people they ruled, to their own accounts; their wealth did not benefit the citizens of their countries. Governments have shown an ability to destroy equity and impoverish nations; however, the ideal government empowers its people to pursue prosperity.

Principle 3 continued (with axiom 3C)

2008-12-30T08:48:00.000-08:00

Axiom 3C. In general, money is best left in the hands of private citizens.

You and I know how best to use our money. Many in government will dispute this, saying that we don’t know how to save for emergencies, or invest to raise our equity for retirement, education, etc. This attitude of “smarter than we are” has propelled government to argue that they should hold our money while we wait for certain exigencies to occur. In the meantime, we can’t use the money for other important things, such as to increase equity in a home. Moreover, while we are waiting, the government is using our money for something we may know nothing about.

“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” Ronald Reagan

Principle 3: Neither encourage bad nor discourage good economic behavior (with axioms 3A and 3B)

2008-12-29T07:14:00.000-08:00

To achieve prosperity, we need to continually invest to increase our equity. However, I boldly predict that not all Americans will read this blog. We do not want nonreaders to be unduly influenced by incentives to reduce equity or increase debt. In the same vein, we do not want blog readers to be unduly influenced by disincentives to increase equity or decrease debt.

“Government "help" to business is just as disastrous as government persecution... the only way a government can be of service to national prosperity is by keeping its hands off.” Ayn Rand

Axiom 3A. To obtain more of something, subsidize it.

A subsidy on anything raises the return to the producer, which as we know, increases supply (see Axiom 2A). When the price reaches the level where supply and demand are in balance, producers will receive no less (and generally more) for the product than before the subsidy was applied and, therefore, the supply will be greater than without the subsidy.

Axiom 3B. To obtain less of something, tax it.

A tax on anything raises its price which reduces demand (see Axiom 2A). Total price (including tax) must then drop to bring supply and demand into balance; this reduces the incentive to make the product and, therefore, supply will be less than before the tax was applied.

Principle 2 continued (with axiom 2D)

2008-12-27T16:00:00.000-08:00

Axiom 2D. Government regulation introduces inefficiency into markets.

This axiom does not say that government regulation is inherently bad. What it does say is that any outside regulation of markets has its cost. An illustrative example was produced during the ongoing credit crunch. In a sinking stock market, at a time when, not surprisingly, financial stocks were sinking even faster than other sectors, some in the federal government thought it would be a good idea to ban short selling, the practice of selling borrowed stock (in order to buy it back later at a lower price to return it to the lender). This, it was thought by some, would protect financial company shares and shareholders. Unfortunately, of course, since most people who believe that a company is overvalued do not already own shares, current shareholders are insulated by the ban on short selling from the information that their company may be in trouble. Then, instead of receiving an early warning to sell while they can still receive some compensation for their shares, they risk being wiped out when the problem becomes general knowledge and their shares crash. Should we likewise ban smoke detectors because they are scary and may send false alarms? It’s no fun to be scared, but banning smoke detectors could have undesirable side effects.

The cry being heard from some of our elected officials is that a lack of regulation was responsible for the recent subprime mortgage crisis. The story is not quite that simple. “In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending. Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more ‘affordable’ loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing. Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.” [How HUD Mortgage Policy Fed The Crisis]

This axiom tells us that regulation, even when the regulation makes sense and the regulators operate as planned, has its cost. A good example is the Federal Deposit Insurance Corporation (FDIC). In simple terms, in exchange for paying into the FDIC, banks can offer their depositors FDIC-insured accounts (now covered up to $100,000). In the midst of an economic crisis, this has had a calming effect of millions of depositors. On the cost side, “under the current system, banks pay anywhere from 5 cents to 43 cents for every $100 deposited, based on their level of risk, according to the FDIC.” [FDIC cost will likely mean higher bank fees]

Another thing to consider with respect to government regulation is that someone or some group must do the regulating; that is non-trivial. Regulators must have access to pertinent information, must be sufficiently trained to understand the information they get, must have the time and resources to review the information and to seek and obtain clarification when needed, and must understand applicable legislation and the scope of their authority; they must also be capable of recognizing abuse or non-compliance, must be immune to corruption (such as bribery) and otherwise free of any conflict of interest, and must have the tools to seek necessary changes.
Regulation is a costly, specialized government activity and the costs to the taxpayer and the economy do not stop with the regulators. The government places demands on companies to supply regulators with the information they need to make their decisions. The burden this places on small companies is particularly heavy since they rarely have the resources to hire new people just to satisfy compliance demands.

Principle 2 continued (with Axioms 2B and 2C)

2008-12-24T09:08:00.000-08:00

Axiom 2B. Competition is the key to higher quality and lower price.

The customer is the ultimate voter. He decides whether and what to buy. When sales of producer A's product are higher than producer B's similar product, B will eventually be compelled to improve his product, reduce his price, or lose market share. Improved products from B will force A to improve his products. Vibrant markets generally attract new suppliers, increasing competition; the consumer is generally a major winner.

If, as expected, the bailout virus that is sweeping our government today, passes to the funding of infrastructure projects, let us hope that at the very least, free and open competition is used to select the contractors. That would be one small favor to beleaguered taxpayers.

Axiom 2C. Monopolies raise prices and lower quality.

This is simply a corollary to Axiom 2B. Monopolies stifle competition.

“Manufacturing and commercial monopolies owe their origin not to a tendency imminent in a capitalist economy but to governmental interventionist policy directed against free trade and laissez faire.” Ludwig von Mises

Principle 2 continued (with Axiom 2A)

2008-12-23T08:50:00.000-08:00

Axiom 2A. Price brings supply and demand into balance.

This axiom explains, in large measure, why markets work. Goods or services in short supply command a high price that both attracts new supply and decreases demand. Greater supply leads to a lower price that then increases demand and so forth. This “law of supply and demand” guides the "invisible hand" described by Adam Smith in his classic work, The Wealth of Nations [Smith, A., The Wealth of Nations, 1776. (Great Minds Series), Prometheus Books, Dec 1991].

A corollary to this axiom is that price controls lead to shortages and rationing. When the price of goods or services is kept low relative to free market valuation, demand increases. If price is controlled artificially by government and not allowed to rise to increase supply, shortage is inevitable. The relevant goods or services must then be rationed, either by the supplier or by the government. The shortages and long lines at gasoline stations in the 1970s were a result of government controls on the price of oil. A pernicious little creation of local governments, “rent control,” limits the amount of money tenants can be charged for apartment rentals; this creates an artificial shortage of rental property with perverse effects such as rationing, low quality, etc.

It is difficult to speak of axioms, which are effectively immutable truths, without looking directly at the current economic crisis where the axioms are at work. Some in government today are anxious to “restore stability” to home prices, but those prices respond to supply (houses for sale are plentiful) and demand (first-time buyers are still unable or unwilling to buy). In this case, axiom 2A must be allowed time to work – prices must be allowed to fall in order to bring supply and demand into balance – for a housing “recovery” to happen. Whether the outgoing or incoming administrations choose to recognize it or not, the same dynamic must be allowed to work in the general market, namely, prices must be allowed to bring the supply of and the demand for labor, goods, and services into balance, in order for the general economy to recover.

None of the following government actions can save us from the law of supply and demand any more than they can from the law of gravity: more regulation; more direction of the economy for infrastructure development, health care, renewable energy, “green” automobiles, or anything else; more transfer of private debt or borrowing to increase our already crushing public debt burden; or more printing of money to devalue people’s savings. So what will bring the economy back to health? Of course, that’s what this entire blog is about, but in a phrase, protecting the free market, our one real hope.

Principle 2: protect the free market

2008-12-22T08:24:00.000-08:00

You may have heard it said that “you can’t just have pure capitalism.” Although the statement is true, the reasoning behind such a statement is often backwards. The speaker usually means that pure capitalism, or an unregulated market economy, would somehow be bad. In fact, pure capitalism is unattainable. A totally free economy, in the libertarian (no government) sense, would imply a smooth-running, free-market system built on the highest levels of integrity, honesty, and trust throughout our citizenry. Creation of such a system might appear to be a noble goal, however since no human society has yet evolved to the necessary level of morality, it is simply a utopian dream. At our present moral state, we need protection from cheaters. As mentioned in an earlier post, we even see cheating in sports, which gave us the term sportsmanship. That is why we have referees in sports. And, we now see more and more “instant replay” as testimony to the human frailties of the referees. Likewise, in spite of a veritable flood of government regulation, financial crime still appears to pay pretty well.

Therefore, we have created government institutions, however imperfect, to protect our free enterprise system. An example of an executive department dedicated to protecting our markets is the Securities and Exchange Commission (SEC). Whether the SEC performs at a level high enough to justify its cost and whether their activities do more stifling (of small companies) than protecting (of investors) are topics beyond the scope of this discussion. In any event, an important part of the SEC charter is to assure full disclosure by companies whose shares trade on our stock exchanges. Even during these troubled economic times, open reporting by most publicly traded companies appears to retain public (investor) trust. Both the existence of the SEC and financial reporting, to an externally provided standard, by publicly traded companies introduce inefficiencies into the markets and prevent us from achieving pure capitalism.

To the greatest extent possible, we want to protect our markets, and by extension our society, from fraud, malicious mischief, theft, extortion, and misrepresentation. There are some in our society who choose not to play by the rules. These cheaters are a threat to all of us. Others choose not to understand the purpose and power of markets and deliberately confuse the threats to our free enterprise system with the system itself. Confusing victim and perpetrator limits our ability to correctly frame the issue. If we want capitalism to take good care of us, we must protect it. Dogs are not born with fleas; pet owners are responsible for making sure that their dogs are as free of fleas as possible.

“If men were angels, no government would be necessary.” James Madison

Another point of confusion is the idea that capitalism is an “uncaring” economic concept and therefore must be tempered by a “caring” government. In fact, only people can care for one another and they can best exhibit that caring under conditions of freedom and prosperity. When Government jumps onto the buyer or seller side of market transactions in order to “protect” some people, they necessarily take from other people. It’s not just that such interventions are contrary to the principle; it’s that when the government favors one group or one industry, it imposes costs on others which may not be sustainable. Families, friends, and charitable organizations in prosperous countries generally are better equipped than government to help people in need; making the country less prosperous damages those innate capacities.

The economic strength of countries like the USA, Japan, and those of Europe derives from a free-enterprise system or free market. The free market allows us to buy and sell goods and services at freely negotiated prices. When government intervenes in that process, the free market becomes both less free and less efficient. Government intervention in the free market introduces friction and we the people suffer the burns. In general, countries with capitalist governments have freer markets and stronger economies than those with statist governments.

“The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” Milton Friedman

Principle 1 continued (with Axioms 1E and 1F)

2008-12-20T21:31:00.000-08:00

Axiom 1E. Transferring money costs money.

I look at this as the “friction” axiom. If you transfer money to me through government, I will not receive all the money you transferred because some of your money will be used to finance the transfer. In the case of government income-transfer programs, the costs can be very high to pay for people and equipment to receive, record, partition, and transmit the funds from you to me and for buildings and facilities to house the people and equipment. In addition to the loss of funds caused by this friction, there is a loss of time, because it is less efficient to give money to someone else to give to me than it is to give the money directly to me. Finally, this friction affects not only you and me; it affects the third party in the middle of our transfer, who is performing a job which offers little opportunity for creative expression.

Axiom 1F. There is a tax rate that maximizes revenue to the government.

This axiom addresses the issue of assuring that tax rates are set below the rate of maximum effectiveness rather than the issue of whether it is desirable to maximize revenue to the government. Arthur Laffer's ingenious "Laffer Curve" starts from the premise that government revenues from taxation are nil at the two extreme tax rates. At 0%, the government is taking no part of everything. At 100%, the government is taking all of nothing (who would work for no benefit?). At some rate between 0% and 100%, revenue to the government from income taxes is maximized. Raising the tax rate beyond the point of maximizing returns damages the economy and reduces government revenues. The reason this occurs is that people whose income levels are high enough to meet basic needs with room to spare, have the flexibility to decide whether it is worth their time and energy to earn extra money. If much of that extra money is taxed away by the government, they may decide to forego it. Others, whose earning power is less prolific, are simply driven to despair by high taxes.

Principle 1 continued (with Axioms 1C and 1D)

2008-12-19T08:22:00.000-08:00

While you may favor certain government actions, you should never lose sight of the next two axioms.

Axiom 1C. All government spending is a tax on the wealth of a nation.

Those who perform a government service must be paid in “real money” and the products they use must be paid for with real money; real money is that which can be used to purchase goods and services produced by the private sector. To be accepted in the private sector, the real money must be raised there, directly, through taxes and borrowing, or indirectly, through inflation. This reduces equity.

If you are in business, there is a very easy way to appreciate this axiom. In your company, I expect that there are two kinds of expenses: direct expenses, including direct labor, which apply to the business you are in, providing customer services or products which are the source of company revenues; and indirect expenses, also including labor, which support the company rather than the customer. Indirect expenses, which may include business development, training, meetings, human resources support, information technology support, and the responsible personnel, are also called “overhead” and must come out of company revenues. Federal government spending is an indirect expense (overhead) for all business and all people working in the private sector. Likewise, unfunded federal mandates, paid for at the state and local levels, are a kind of “taxation without representation.”

Axiom 1D. There are three ways to pay for federal spending: taxation; borrowing; and inflation.

Debates about taxes and deficits are diversions from the underlying “real” issue. We could argue forever – and we probably will – about which is worse, destroying profitability and jobs through high taxes, mortgaging our future by increasing the national debt, or eroding the value of our money and our international position through inflation and devaluation of our currency. These would be harmless arguments if they did not blind us to the key point that these methods of payment are simply responses to federal government spending. Once we decide what government services we require and are prepared to pay for, we are ready to quibble about how to “settle the damages” (a very appropriate expression!). As has already been pointed out, we require relatively few services from the federal government – the government services we really need are provided at the state and local levels.

Principle 1 continued (with Axiom 1B)

2008-12-18T08:11:00.000-08:00

Axiom 1B. Healthy business profits are necessary to a healthy economy.

Profits are the raison d'être of work and business. Clearly, home chores and volunteer work can be satisfying and productive; however, these are not the activities that put food on most dinner tables. A profitable business generally offers a useful service or product; profits may be taken as one measure of this utility. Profits may be reinvested in the business to make it more productive, more competitive, more responsive to customers, and more beneficial to employees. Profits may be distributed to owners and employees. Or, profits may be used to expand the business; this generally creates job opportunities. And as profits flow to stronger companies and economic sectors, the economy and the workforce of the country adapt to weaknesses in other sectors. Using profits to expand business reduces the need to take on debt.

Principle 1: protect the equity of all citizens (with Axiom 1A)

2008-12-17T07:23:00.000-08:00

We’re striving to build our personal equity. Since we know we need a government, let’s adopt the principle that the government will protect that equity. Our first axiom ties what is good for us as individuals to what is good for business and the economy in general.

“A claim for equality of material position can be met only by a government with totalitarian powers.” Friedrich August von Hayek

Axiom 1A. Equity financing is desirable.

One indicator of how well our economy is doing is the performance of our stock markets; stock prices measure the health of equity financing in the country. High stock prices indicate that ownership of business is prized and that capital can be raised efficiently in exchange for equity; the attraction is the promise of a return, through dividends, or capital gain through the sale of shares at an increased price. By contrast, debt financing increases the demand (and raises the price) on debt. Also, debt must be repaid regardless of the presence or absence of business profits. This axiom does not tell us that debt is bad; it tells us that equity financing is generally more efficient.

When you sell stock to expand your business, you share ownership with other stock holders. Likewise, when you buy stock, you join another business as a part owner. One criterion that I use when buying stock in any company is a healthy balance sheet as indicated by a low ratio of debt to cash and equity. This is not necessarily a predictor of future performance, but it is a strong indicator of both past performance and current risk.

In the last several months, the value of stocks on the American and world markets has dropped dramatically. In general, this reflects lower earnings expected during the continuing recession. My claim is that excessive debt has led to a drop in home values, defaults, and tighter credit, all factors in bringing on the recession. The recession in turn has been characterized by job losses and reduced purchasing power. Losses in the stock market make it difficult for new companies to raise new money through Initial Public Offerings - equity financing – thereby retarding the recovery. Watch the stock market for clues about if and when our economy will recover; equity financing and recovery must ultimately be linked to a reduction in debt levels.

If you own your own business, you will like the next axiom.

Chapter 5: Principles and related axioms

2008-12-16T09:00:00.000-08:00

I now offer four principles as guidance for how government – we have agreed to address the federal government – would act on our behalf to protect our equities and our freedoms. I also include the axioms which underlie each principle; the violation of an axiom is a violation of the related principle. This discussion will set the stage for the following chapters which give examples of undesirable federal government programs and behaviors and prescriptions for change.

The first principle, protect the equity of all citizens, is intended to create an environment where your prosperity is recognized as a key component of the prosperity of our country. The second principle, protect the free market, is based on the knowledge that a free market provides the best environment in which to increase the equity of most citizens. The third principle, neither encourage bad nor discourage good economic behavior, means that we do not want government to offer you incentives to decrease or disincentives to increase your own equity. No separate principle of encouraging good behavior is included because we don’t want someone from Washington DC, who doesn’t know anything about us, to “help” us make good decisions regarding building our own equity; we know what’s in our own best interest.

Because our constitution stipulates a role for our federal government in foreign affairs, you will find a fourth principle here, be consistent, at home and abroad. I believe that internal consistency is the basis on which we must relate to other countries.

Five Generic Definitions

2008-12-15T10:58:00.000-08:00

Change of pace! In preparation for the more analytical part of the equity discussion, I will define five terms; the example used is only marginally related to economics. This is intentional; the terms are generic.

A goal is a desired outcome. Example, reduce crime. Stating a goal is not the same as saying how to meet it (discussed under strategy and actions below).

A principle is a rule of conduct. Example: reduce crime while protecting the public. In our zeal to meet a goal, however worthy, our government must take care to protect our rights. The sixth amendment to the Constitution of the United States guarantees anyone suspected of a crime the right to confront his (or her) accuser, the right to a speedy trial by a jury of his peers, and the presumption of innocence until proven guilty. [Agel, Jerome B., We, The People, Random House, Inc., 1997, pg. 45.] Related rights include protection against unwarranted search and seizure, false accusation, and self-incrimination. While the prosecution and conviction of real criminals is a key part of protecting the public, our principle says that the rights and freedoms of all of us must be protected in the process.

An axiom is a basic truth. Example: imprisoning criminals reduces crime. The Random House College Dictionary tells us that an axiom is "a self-evident truth, a universally accepted principle or rule, (and in mathematics) a proposition that is assumed without proof for the sake of studying the consequence that follows from it." Axioms will indeed be presented in coming posts without proof; however, rooted in the laws of economics, they are explained in enough detail to appeal to your intuition. Real world experience has shown them to be true. They are grouped according to the principles that they support.

It may seem obvious, but no amount of arguing, posturing, or presenting of statistics will alter an axiom. In addition, ignoring an axiom won’t make it go away. One axiom presented in this book, price brings supply and demand into balance, was ignored by our government during the 1970s when price controls were levied on energy products. As a result, the country experienced petroleum shortages and long lines at gasoline pumps. Even the mighty US Congress was unable to repeal an axiom, in this case, “the law of supply and demand.” [Wells, Wyatt, American Capitalism, 1945-2000, Ivan R Dee, Chicago, 2003, pg. 103-7.]

“Efforts and courage are not enough without purpose and direction.” John F. Kennedy

A strategy is an approach to meeting a goal. Example: to reduce crime, strengthen our police department. In the formulation of a strategy, enlightened adults may differ. The strategy we choose to reduce crime will ideally suit the situation. To achieve our goals, we must choose strategies which support our principles but do not violate our axioms.

An action is a program or policy. Example: hire additional police officers. Actions implement the strategy; each action is something that we actually do, that we can measure. I can assign the action to you – and make available the necessary resources – to hire some number of police officers over a given time period. I can then determine whether the action was carried out. This may seem obvious, but in some cases, people will argue against a strategy based on the allegation that “we’ve tried that and it didn’t work.” To confirm or refute that allegation, it is important to determine what actions were actually taken in support of the strategy and what measurements were made to test how well the actions worked.

“Most people stumble over the truth, now and then, but they usually manage to pick themselves up and go on, anyway.” Winston Churchill

Macroeconomics: Market economies and other economic organizations (2)

2008-12-14T11:41:00.000-08:00

Statist economies: Socialism and Communism

Statist economies take decision-making out of the hands of individuals in the society. For example, Karl Marx argued that, under communism in its “higher” phases, “the principle of ‘from each according to his ability, to each according to his needs’ would prevail.” [Ebenstein, W. and Ebenstein, A., Great Political Thinkers, Plato to the Present, Harcourt College Publishers, 6th ed., 2000, pg. 643] This credo unfortunately left little room for “wants.” Communist societies impoverished themselves by stamping out initiative, creativity, efficiency, and productivity. More generally, when governments make decisions for all, they do a poor job of making decisions for individuals. In the bad old days of the Soviet Union, prior to 1989, Russian workers in state-owned factories built to meet government quotas rather than to satisfy a proven level of demand.

“Communism has never come to power in a country that was not disrupted by war or corruption, or both.” John F. Kennedy

21st century China is proof that statist economies can become more capitalist. While the Chinese government of 2008 is a far cry from that of Mao Tse Tung, whose “Great Leap Forward”15 (1958-1960) and “Cultural Revolution”16 (1965-1968) destroyed millions of lives and countless equity and set the Chinese economy back decades, China is still ruled by dictators who control the military and tax the general populace. Nevertheless, the government has greatly relaxed control of the economy and diminished the profile of state-owned industries, allowing a wide open, almost wild economy to flourish. Some would say that the economy is too open, with no apparent restraints or protections; for example, violations of trademarks, patents, and copyrights are rampant and quality control is random. However, the release of Chinese creativity and entrepreneurship has made China the fastest growing large economy in the world.

“To cure the British disease with socialism was like trying to cure leukemia with leeches.” Margaret Thatcher

21st century USA offers proof that capitalist economies can become more statist. In a stunning example of leadership in reverse, an administration and a congress of self-proclaimed conservatives, supposedly in favor of limiting the power and scope of the federal government, actually increased the level of government spending in every aspect of the federal budget during the period 2001-2008. And even with the end of the current administration only weeks away, “bailouts” continue to move money from the many (taxpayers) to the few (enterprises which have stumbled for one reason or another). This surprising turn of events demonstrates that checks and balances count for more than ideology. The former was at work during the period 1995 through 2001, when a president from the Democratic Party was balanced by a congress with a Republican majority; this combination passed relatively little important new legislation which protected taxpayers from new federal spending.

“Whoever wishes peace among peoples must fight statism.” Ludwig von Mises

By contrast, the advertised conservative ideology failed to protect taxpayers from costly executive schemes – most notably the invasions and occupations of Iraq and Afghanistan and the expansion of Medicare – and Congressional “earmarks” (designed to distribute money to a few in relatively secrecy) put forward by the Republican majority; the rush by Congress to bring money back to their own districts to pay for reelection campaigns, and the reluctance of the president to restrain legislators from his own party has been costly.

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” Winston Churchill

Macroeconomics: Market economies and other economic organizations

2008-12-12T12:29:00.000-08:00

Capitalism

Capitalist societies promote free markets. They leave most personal and economic decisions in the hands of individuals in the society. Left to their own devices, most adults make decisions in their best interest. This is not surprising; in order to stay alive, people tend to address basic needs first, especially the needs for food and shelter. Once their basic needs are met, they address further needs for clothing and transportation, and for medical care, and home and car insurance. Parents generally plan to meet the needs of their children. If they earn enough, workers will have some money left over after meeting their needs; they may use this discretionary money to satisfy wants (e.g., for vacations or entertainment) or to save and invest. In other words, given the opportunity, most people choose to increase their equity.

When people act in their own best interest, they generally strengthen both themselves and the society to which they belong. This is intuitively true because markets which cater to people’s needs tend, by definition, to have a strong, long-term customer base. People will always need food and shelter; markets in these areas will be strong and vibrant (as long as government does not stifle them). Some people, including the late Pope John Paul 2, have expressed skepticism about capitalism and capitalists, both of which they feel are overly materialistic and unconcerned about the poor. In this regard, capitalism has been a victim of its own success. Other economic systems – particularly “statist” systems, discussed in the next section – have been less successful and have left their respective countries poorer; therefore, the citizens of those countries have much less to be materialistic about and much less to give (or not give) to charitable causes.

It is also fair to say that capitalism itself has no inherent morality; it is merely the most efficient economic system yet devised by large societies. Morality must come from people. We can say that, by giving their citizens an increased chance of prospering, capitalist societies do position people to help others. Some might say that capitalists would do the most good by persuading others to emulate them.

“History suggests that capitalism is a necessary condition for political freedom.” Milton Friedman

Economic Fundamentals: Microeconomics (8)

2008-12-11T08:23:00.000-08:00

Markets - part 3

Some people choose to distinguish “Wall Street” from “Main Street.” This distinction, if it exists at all, is not only misleading; it serves as an excuse for a continued reliance on debt. A healthy stock market is testimony to the desirability of holding equity in publicly traded companies; this in turn provides a basis for equity financing of business growth. This is fundamental to the shift back to an equity-based economy –away from our current culture of debt – that I am advocating. An unhealthy stock market is an indication of a reluctance to invest, which makes it difficult to expand equity. If a business cannot expand on Wall Street, it will not create new jobs on Main Street. Also, as most Americans well understand by now, a weak stock market negatively affects anyone with money in a pension fund or a mutual fund through an Individual Retirement Account (IRA) or 401(k).

An auction is a market where sellers offer products to a group of buyers who bid until a highest offer is agreed upon. The transaction is recorded at this highest price. The markets mentioned above, e.g., the stock market, facilitate transactions by matching the asking prices of potential sellers with bids of potential buyers. EBAY is an example of a continuous auction on the Internet.

Often, private businesses and governments prefer to finance projects or expansions using debt. Corporations, municipalities, and government use bonds to borrow money. When a corporation uses this technique to borrow from me, it gives me a bond in exchange for the money which I lend them. The bond promises me a pre-specified rate of interest. For example, if I buy a $1000 bond at 4% interest, I can expect to receive $40 dollars a year from the corporation as long as I hold the bond. Since that is an expense for the corporation, they usually reserve the right to recall the bond at any time in exchange for my original $1000 plus any interest owed. Whether interest rates rise or fall, I can redeem my bond for the full $1000 at maturity. Note that bond values appreciate as interest rates drop (a 4% bond is more valuable in a 2% interest rate environment); the recall feature protects the bond issuer in this case. Likewise, bond values fall when interest rates rise.

Banks, insurance companies, and other financial institutions offer funds, portfolios of stocks, bonds, commodities, and other financial assets and instruments, to investors who wish to diversify their financial holdings. So-called “experts” put together these portfolios, whose performance histories are tracked closely by the financial press, to the benefit of investors. The companies typically make their money on fees charged for transactions, either buying of selling shares in the fund.

There is inherent risk in many parts of our lives, in driving a car, owning a home, and in simply being alive because of our potential need for medical care in the face of injury or illness. For this reason, most of us purchase various types of insurance to protect ourselves against “catastrophic” loss. We purchase life insurance, to guard our families against the loss of income in the event of our untimely passing; we purchase auto insurance to protect us from large costs if we should be at fault in an accident; we purchase homeowner’s insurance to protect against financial loss in case fire strikes our home; and we purchase medical insurance to protect us against financial trauma which invariably accompanies the treatment of medical trauma. Insurance works because when risk can be computed accurately, using statistics, it is possible to pool the money of the many to protect the few who will need it each year. Theoretically, an insurance company “holds the bets” (the pool) and adjusts premiums to assure that, on a statistical basis, this year’s catastrophic losses will be covered.

Our economy is based on levels of trust among market participants. Buyers and sellers tend to trust each other to deliver goods or services and payments. Without that trust, transactions are still possible, but tend to require more safeguards and to proceed more slowly. Violations of trust, especially when they occur among government officials can include favoritism brought about through bribery, nepotism, extortion, prejudice, misleading information, fraud, etc., and are generally termed corruption. Corruption destroys trust and the equity of individuals, economies, and societies.

In summary, markets allow buyers and sellers to come together to exchange goods. Markets operate to mutual advantage when they are free, but keeping them free requires protection; a legitimate function of the federal government is to provide that protection.

Economic Fundamentals: Microeconomics (7)

2008-12-10T13:15:00.000-08:00

Markets - part 2

Commodities are goods, normally unfinished goods (such as steel) or raw materials (such as coal), of virtually identical type. Crude oil from Nigeria is (in principle) virtually indistinguishable from crude oil from Mexico or the Middle East. The price of wheat from Kansas will be affected by the amount of wheat available from Argentina. The variability of commodity prices introduces risk into such businesses as farming and mining. A farmer must invest a significant amount of time, energy, and money in the summer and fall to raise a wheat crop in the spring. If the money he realizes from selling his crop does not cover his costs, he will lose money; if he cannot make a profit over time, he will go out of business. His need to reduce risk has given rise to the commodities market, where our farmer may sign a contract to sell his wheat at a price he negotiates in advance. The largest US Commodities Market is the Chicago Board of Trade.

For example, although it may be December and we don’t really know for sure how much wheat will sell for in May, the farmer may sign a contract with a buyer to sell 1000 bushels of wheat at $5 per bushel. If open market wheat prices in May are less than $5 per bushel, the farmer benefits by exercising the contract; that is, he sells 1000 bushels of wheat to the buyer for $5000 and makes the profit he expected; in this case, the buyer takes a loss because he paid more than market value for the wheat. However, if wheat prices are above $5 per bushel, the buyer benefits since he can resell the wheat at a higher price; notice that the farmer gets what he originally expected and does not lose money. In the commodities market, buyers are also known as “speculators.” Based on the fluctuation in market prices, commodities contracts also gain and lose value and are generally traded ahead of the delivery of the actual commodity.

The money of a country may itself gain and lose value. Our currency, the dollar, is measured continuously against the European Euro, the British Pound, the Swiss Franc, the Japanese Yen, and other currencies. Currency markets operate similarly to commodities markets and allow contracts to be written guaranteeing the right to exchange a certain amount of money in one currency against that in another.

Before discussing stock markets, let’s return to my pizza restaurant. Suppose that I am very successful in setting up and operating this small business. I think that I have the formula for success, but I would like to fulfill two new goals: I would like to expand to open new restaurants; and I would like to cash in on (realize the equity from) my success. To obtain the money I need to expand, I could borrow, but I prefer equity financing to debt. Therefore, I decide to sell equity, or stock, in my restaurant business. For example, suppose that I sell 20% of my business for $200,000. In practice, I might create 10,000 shares of stock in my business and offer 2000 shares for sale at $100 each. It is obviously necessary to find a buyer for those shares, but if and when I do I will realize both goals: first, my new company will have $200,000 for expansion; second, my remaining 8000 shares, the 80% of the company that I did not sell, are now worth 80% of $200,000 + whatever the original restaurant was worth. This exercise is referred to as going public because investors in other peoples’ companies can participate in the so-called after market for stocks, also called the stock market, open to public trading of the shares. Going public can be very rewarding to entrepreneurs. If my business is successful, the value of the shares will probably rise. The larger US stock markets are the New York Stock Exchange, the National Association of Stock Dealers (NASDAQ) Exchange, and the American Stock Exchange.

Economic Fundamentals: Microeconomics (6)

2008-12-09T14:04:00.000-08:00

Markets - part 1

A market is an environment in which exchanges of goods, services, and labor are negotiated and executed. A free market is one in which buyers and sellers freely negotiate agreements and contracts to exchange goods and services for other goods and services or for money. Any government regulation of a free market is understood to be for the protection of all parties to the transaction, as agreed to by those parties, rather than to control or limit such transactions; if this is not true, the market in question is not free. The petroleum, and in particular, the gasoline market is an example of a market which is “relatively” free in the United States. This has not always been the case; in the 1970s, price controls on gasoline led to shortages and long lines at gasoline pumps.12 Decontrol under President Carter mitigated the problem then, but, since US drivers are so dependent on their automobiles, re-control from a congress eager to blame “big oil” for rising prices, is a recurring threat; the threat invariably recedes with prices. We will discuss the underlying issue, the so-called “law of supply and demand,” later in the book.

In markets, money plays two related roles: it serves as the medium for the exchange, meaning that money is considered to be fair payment; and the amount of money paid places a value on the transaction. For example, I am free to buy a car at any price agreeable to the seller. The price I pay is the market value which is, by definition, what the car is worth (as mentioned earlier, there must be a real buyer to establish a market value).

In the market for goods, finished or unfinished, buyer and seller normally reach an agreement to exchange money for a product. New cars are expensive, so I may have to borrow some of the money to pay for the car; that does not change the basic principle that the seller will receive an agreed-upon amount of money for the car and that I am ultimately liable for that amount plus any interest on my loan. Likewise, in the market for services, I may agree to pay money to my local telephone company for telephone services (a phone number, the capability to initiate and receive calls, message service, etc). While the amount I pay for services may appear to be fixed, if I find that rate too high or the service inadequate, I have the option of securing service from another company; depending on my circumstances, I may also have the option of bypassing phone companies and using other media (e.g., the Internet) to communicate with others.

The market for labor is analogous. Suppose I open a pizza restaurant. At first, I may be able to do everything myself: open for business in the morning; take orders; prepare the pizza; serve; clean up; and close up. With any success at all, my business will improve to the point where I am unable to do it all. When I hire someone or some others to help, I have entered the labor market. You are likely to work for me only if 1) I offer you a wage commensurate with your skill level and the difficulty of the work and 2) you are unable to secure better pay at another job. If and when you do decide to work for me, your skill and efficiency are likely to rise over time. I realize that for me to keep you as an employee, I may have to raise the level of your pay to reflect your increased value to the restaurant. Note the importance of your investment in the skill equity and the employer’s investment in you, an important equity for him.

Economic Fundamentals - Microeconomics (5)

2008-12-08T10:48:00.000-08:00

Money - part 3

In a narrow sense, equity is the amount of a tangible asset that is owned. To continue our home buying example from above – which ignores commissions and fees – imagine that a buyer puts $20,000 down to purchase a home at $100,000; he finances the balance with an $80,000 mortgage. From the sale, we can say that the home is worth the full $100,000; note that the monetary value of anything must be confirmed by the presence of a buyer willing to pay the stated amount. At the time of purchase we say that the new owner has $20,000 of equity in the home; this is the amount of money that he would realize were he to sell the property today ($100,000 - $80,000). In five years, we can imagine that prices have increased and that the property is worth $120,000. Moreover, our homeowner has paid down some of his mortgage and now owes $70,000. His equity in the property has increased to $50,000. The strong appreciation of his original $20,000 investment is due to leverage, the use of borrowed money (the $80,000 mortgage) to make a purchase beyond his immediate means. By the way, had the price of the property decreased – we are now witnessing many such cases – the leverage would have had a negative effect. It is leverage that made many real-estate investors wealthy during much of the 20th Century; it is leverage that has driven many recent buyers from their homes recently. Note also that the use of the $80,000 is not free; the first payments on long-term mortgages primarily service interest.

Inflation and its dual, deflation, impact the value of money. Technically, the rate of inflation of a currency is the difference between the rate of increase in the money supply and the rate of increase in industrial productivity. If our Federal Reserve Bank increases the supply of money at a time when our productivity is constant, the effect will be that more money is “chasing” the same amount of goods and services. This effect represents inflation because each dollar can now buy fewer goods and services. However, an increase by our industries in the supply of goods and services due to higher productivity will theoretically decrease the rate of inflation.

This easy explanation of inflation must be viewed with caution. First, measuring the amount of money available to buy goods and services is no easy matter: ready cash, savings, and credit may all be used to purchase goods and services; and, it is not always obvious when to factor in the dollars which are in other countries. Second, consumers are not always willing or able to spend; we have seen some consumers become more cautious in these difficult times and others, who would like to buy, unable to secure credit. Nevertheless, when the pace of new money creation exceeds the pace of productivity expansion, the long-term trend is inflationary.

We live in a globalized economy; free trade can also serve to moderate inflation by making more goods and services available to us and thus bringing competitive prices. If the increase in the rate of productivity and the supply of goods services from outside the country exceed the rate of increase in the money supply, we have deflation, where each dollar can now buy more goods and services. To balance this picture, free trade can help us by making our now cheaper goods and services available as exports. Inflation, or the devaluation of a currency, can have severe negative consequences; it erodes savings equity, which generally hits retired people hardest, drives up prices for goods and services, and puts upward pressure on labor rates and downward pressure on employment. Another “wild card” in this discussion is the tendency by some international holders of dollars to delay making purchases to avoid driving down the dollar; this has the effect of masking inflationary tendencies.

In summary, money takes many forms, but it should be clear that it is important to protect the value of our money in order to protect our equity. Article 1, Section 8 of the Constitution states that “The Congress shall have Power … to coin Money, regulate the value thereof, and of foreign coin.” They have delegated that power to the Federal Reserve, an institution which has been an inconsistent guardian of the dollar.

Economic Fundamentals - Microeconomics (4)

2008-12-07T12:51:00.000-08:00

Money - part 2

In today’s world, except in a few isolated societies, just about everyone needs money. In the United States, even a relatively self-sufficient farmer who owns his own land, grows his own food, and builds and maintains his own shelter, still generally needs to pay property taxes, buy seeds for planting, and buy equipment and implements for structure and equipment maintenance. In isolated regions of some countries, barter and communal economies still survive, however even those people, once exposed to the products of the modern world, tend to seek the money necessary to buy them.

Money has obviously undergone change. In the USA we have gone from gold, through the gold-standard dollar (redeemable for gold) to the dollar backed by the full faith of our federal government. An important change we see today is the way money is exchanged. Electronic transfers, credit cards, and debit cards have changed the method and the pace of money exchange. Purchases over the internet, phone transactions, and automatic teller machines have changed the way in which we access and use money. Money to pay our salaries may be transferred directly to a bank account which is in turn automatically debited by our creditors to pay utility bills and mortgages.

Money will continue to change. We can obtain phone cards and various gift cards that carry magnetically recorded values, values which can be accessed by authorized computer programs. It is not difficult to imagine that such cards and like ways of storing money individually will proliferate. In general, the function of banks as places for safe storage of gold and currency is likely to give way to more personalized stores of money backed by the credit of institutions, whose banking functions are minor, or more directly by individuals with “registered” collateral (as a guarantee of repayment.).

One useful approach to build equity and achieve prosperity is saving. When we save our money in an account with a financial institution, we generally receive interest, payment by the institution for lending them the money. If we put $100 into our savings account at an interest rate of 2% per year, we can expect to receive $2 at the end of one year. Compound interest, the interest on the total amount, becomes a leveraging factor; at the end of the second year, we earn 2% of $102, i.e., $2.04. The account will double in value in 36 years (calculated by dividing 2 into the “magic number,” 72); at a 6% rate, our money doubles in 12 years. While the numbers in this example are relatively small, the earnings become significant over time, especially if we continue to contribute to the account. Of course, you are probably already screaming “what about inflation!” We’ll get to that. The point is that compounding interest or profits can be powerful.

Debt, the opposite of equity, is money owed by a borrower to a lender. Debt is generally incurred in the form of a contract to take delivery on some product or service now and to pay for all or part of it later. As we discussed earlier, houses are so expensive that those who don’t have them and who need them most – young people with families – can rarely afford to pay for them with cash. Most home buyers make a “down payment” (typically 20% or more of the purchase price) and obtain a “mortgage,” a loan backed by the collateral (resale value) of the home, to pay the balance. A mortgage is a debt, money that the home buyer owes to a bank or other financial institution, which he must pay back. As a society, we have borrowed so much that debt, both public and private, has grown far beyond our abilities to repay. In response, most financial institutions have slowed lending dramatically. This resulted in panic which has led to a clamor for “bailouts;” a bailout is a large increase in government debt intended to save rescue a limited number of companies or individuals who made costly financial decisions, such as taking on too much private debt or lending to those who took on too much private debt. This exchange of public debt for private debt shifts the burden of the costly decisions from the people who made them to our young workers who must, in the years to come, attempt to service the swelling public debt.

Mortgages are offered by lenders at interest, a fixed or variable rate depending on the terms of the loan. The lender makes his money on the interest (the price of the loan to the borrower); in the case of default, a failure of the borrower to meet his part of the contract, the lender can recover all or part of his loan by repossessing and selling the home. In 2008, we have seen property values drop and a greater (than normal) number of borrowers default. In my opinion, this has been largely caused by a failure of banks to properly “qualify” borrowers; since both borrower and lender seemed convinced that the value of homes could never fall (demonstrably false at this point), neither saw the necessity of making certain that the mortgage payments could be covered by the borrowers income. In other words, defaults were not feared since the borrower would be able to “re-finance” his way out of any problem (also demonstrably false).

Economic Fundamentals - Microeconomics (3)

2008-12-06T09:09:00.000-08:00

Money - part 1

Money is an exchange medium or currency which allows a value (in the currency) to be placed on goods and services. In the USA our money (dollars) is legal tender for all debts, public and private. Money allows goods and services to be exchanged at different times and at different valuations; I can take my hogs to market today and be paid in money, which I can use to buy clothes and a hat tomorrow. You can paint my house today and then use the money from me to help you pay for a new truck. Examples of early money are precious metals or gems, items which were relatively easy to transport. Once again, you may turn to Adam Smith for an in-depth discussion of this topic. [Smith, Adam, The Wealth of Nations, Alfred A Knopf, Inc., New York, 1910. C. Wells, Wyatt, American Capitalism, 1945-2000, Ivan R Dee, Chicago, 2003, pg. 19-25.]

Before we had money, barter and communal cooperation were the primary means of exchange; each of these had obvious limitations and constraints. Markets, where people come together regularly from throughout the region, still flourish in much of the world. However, in the case of barter, my hogs and the clothes and hat for which I want to trade would have to arrive at the same market at the same time. Consequently, barter is not conducive to making a wide variety of goods and services accessible to all, a difficulty which money addresses.

In the case of communal cooperation, both goods and services are made available throughout the community. While an attractive scheme in principle, the practice of communal life has shown that commune members receive primarily indirect rewards – self-satisfaction or the praise of observers – for their efforts and that deprived of direct compensation (equity) for themselves and their immediate families, many feel little incentive to produce. The Quakers and Amish in the United States and the Kibbutzim (whose numbers are small, approximately 2.5%, relative to the population) of Israel notwithstanding, communes are but a tiny fraction of our free societies.

In general, money is defined by anyone or any group who accepts payment in the currency – gold, silver, and diamonds used to be widely accepted currencies. These days, governments define legal tenders for internal use and external exchange. In addition, federal governments generally “print” money. In the USA, our federal government and the banks which constitute our Federal Reserve System, the result of the Federal Reserve act of 1913, serve as the key monetary authority of the country. In today’s Europe, banks from member countries of the European Economic Union control the supply of Euros, the common currency of member countries.

The value of the American dollar used to be tied to gold. As recently as 1968, under the Bretton Woods agreement, the “official” price of gold in the USA was $35 per ounce. However, our country and currency base had grown beyond our ability to redeem all outstanding dollars in gold and since it was no longer possible to control the price of gold in dollars, the US Government effectively abandoned the gold standard. A dollar is now simply worth the amount of goods and services it may purchase; that worth is also measured against the worth of commodities such as gold and of the currencies of other countries. In my opinion, it would be unrealistic to re-institute a gold standard; however, as Ron Paul has observed, the Federal Reserve, much in the news lately, has played the role of a provider of last resort to our government when it has overspent; this represents unlegislated “inflation” (to be discussed soon).

Economic Fundamentals - Microeconomics (2)

2008-12-05T07:34:00.000-08:00

Division of labor

Tribes were most efficient when members took on the tasks for which they were best suited. For example, if the best hunters hunted, the best cooks cooked, and the best carpenters built homes, the tribe would begin to realize economies of scale. In moving to such a division of labor, the tribe would trade individual self-sufficiency – where each tribe member does a little of everything – for tribal self-sufficiency, where individuals become more efficient at a few things and the tribe becomes more efficient in general. Adam Smith begins an in-depth discussion of this topic with this introduction: “The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.” [Smith, Adam, The Wealth of Nations, Alfred A Knopf, Inc., New York, 1910. C. Wells, Wyatt, American Capitalism, 1945-2000, Ivan R Dee, Chicago, 2003, pg. 4]

Economic Fundamentals - Microeconomics (1)

2008-12-04T08:13:00.000-08:00

Economics of the tribe

The following is as much parable as history, but it is close enough to reality in most cases and serves to put the present in perspective. I will stipulate that we are descended from people who lived in tribes, or extended families. Either the tribe was self-sufficient or it perished. The tribe had to obtain food, shelter, and clothing, settle internal disputes, and either settle or prevail in disputes with other tribes. If the tribe was nomadic, it either had to travel on lands that were not “owned” by others or risk disputes. If stationary, the tribe worked the land and defended its land and possessions. A welcome situation for the tribe was to meet other, friendly tribes with which to trade.

Chapter 4: Economic Fundamentals

2008-12-03T08:45:00.000-08:00

In this chapter, we introduce the subject of economics; this is just a taste of course since there are economists, professors, scholars, Internet weblogs, textbooks, periodicals, and whole university departments devoted to the subject. Nevertheless, given the neglect of economics in our high schools and our national media, some of the basic principles may have slipped past you. By insisting that government use proven economic principles to formulate public policy, we can raise the probability that our government will protect our equity.

“Facts and truth really don't have much to do with each other.” William Faulkner

Economics and economists

You may have heard economics referred to as “the dismal science.” One explanation for this is that an economist’s view of the world always includes negatives. For example, if our country’s economy is strong, it can trigger inflation and higher interest rates. If our economy is weak, it can lead to a loss of purchasing power in general and job loss in particular.

Economics is the study of money and markets and their relationships to our society. An economist is someone who analyzes the economy (of one or more societies or countries) and makes predictions on performance or suggests policy changes. Well-known economists include Adam Smith, who described how nations can create wealth [Smith, A., The Wealth of Nations, 1776. (Great Minds Series), Prometheus Books, Dec 1991], Milton Friedman, who introduced several key economic concepts surrounding the nation’s money supply and flat and negative income taxes [Friedman, M., Capitalism and Freedom, University of Chicago Press, 1963 and Friedman, M. and Friedman, R.D., Free to Choose: A Personal Statement, Harcourt Brace, 1990], and Arthur Laffer, who introduced the Laffer Curve [Hailstones, Thomas J., Viewpoints on Supply-Side Economics, 1982]. Ron Paul, who ran for the Republican nomination for President in 2007-2008, wrote Pillars of Prosperity [Paul, Ron, Pillars of Prosperity, Mises Institute, 1 March 2008, 484 pp.] to show how to apply economics to good government.

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” Thomas Sowell

A strong grasp of economics fundamentals is necessary to make good decisions in our private lives and in the area of public-policy. The better we understand those fundamentals, the more likely it is that our decisions will lead to prosperity. I will again define prosperity to be the condition that I have the economic resources to acquire the necessities of life for myself and my family, now and in the foreseeable future. The prosperity of a society is built on the prosperity of its citizens. Poverty, the opposite of prosperity, is a condition I do not want for myself or for you. While poverty may be a fact of some lives, I claim that it is avoidable for most Americans.

Chapter 3: Understanding the problem – offering an overarching goal

2008-12-02T07:44:00.000-08:00

Before calling for solutions and crafting changes to the way we govern ourselves, it is useful to understand our current situation. The problems we face at local and state levels are similar. I believe that local and state governments deserve our support and our oversight because they have direct effects on our daily lives and their services need to be efficiently provided, well supported, and openly reported to preserve the equity we are building at home. However, since Americans live in 50 different states and hundreds of cities and towns, we will focus going forward on the federal level, where the government, for better or worse, is common to us all.

In a 2 July 2006 opinion piece in the San Diego Union Tribune, Brian Riedl wrote that “left unchecked, Washington’s overspending could drown America in taxes and debt” [Riedl, Brian, Runaway Spending, Source: The Heritage Foundation, printed on pp G1 and G4, Insight section, San Diego Union-Tribune, 2 July 2006]. It is now December 2008; if we’re not already drowning, we do appear to be sinking pretty fast. You are undoubtedly feeling this already: our personal equity is burdened by high government taxes and even higher public debt; private debt is too high; the cost of health care continues to increase; unsecured debt at financial institutions has weakened the currency and the trust of depositors; a weak dollar is further undermining our equity; federal government overspending has weakened the private economy and our personal equity; and the stock market, a mere shadow of its former self, reflects this dismal picture.

“All that seems indispensible in stating the account between the dead and the living, is to see that the debts against the latter do not exceed the advances made by the former.” James Madison

You and I are not amused. We want better control over our own destinies. We expect to keep more of what we earn, invest our money to build our own equity, keep our savings and investments in a currency (the dollar) that holds its value, own our own homes, be able to afford the necessities of life, and to retire on our own terms. Is this level of prosperity possible once again? Yes. Is there any way to guarantee it? No. The reason we can’t guarantee it is that there are few certainties in life; I expect to be dead within 35 years but I could be dead tomorrow. Guaranteeing a prosperous life is unrealistic; however to raise the probability of a prosperous life through the protection of equity is a reasonable goal.

“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.” Adam Smith

Federal government

2008-12-01T08:31:00.000-08:00

The constitution provides for these federal government services (the author’s underlining): 1) The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States…; 2) To borrow Money on the credit of the United States; 3) To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes; 4) To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States; 5) To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; 6) To provide for the Punishment of counterfeiting the Securities and current Coin of the United States; 7) To establish Post Offices and post Roads; 8) To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries; 9) To constitute Tribunals inferior to the supreme Court; 10) To define and punish Piracies and Felonies committed on the high Seas, and Offences against the Law of Nations; 11) To declare War…; 12) To raise and support Armies…; 13) To provide and maintain a Navy; 14: To make Rules for the Government and Regulation of the land and naval Forces; 15) To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions; 16) To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia…; 17) To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the Acceptance of Congress, become the Seat of the Government of the United States [Washington DC]…; And 18) To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers...

“That government is best which governs the least, because its people discipline themselves.” Thomas Jefferson

When we compare the activities called for in the Constitution with what our federal government does for us (or to us) today, we see discrepancies. The quick conclusion is that there are changes we can make which will better protect our equity and bring us into harmony with the Constitution.

“Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.” George Washington

State government

2008-11-30T16:54:00.000-08:00

The government of my state is responsible for water-resource management and highway construction and management. The state charters and manages an extensive college and university system serving hundreds of thousands of students. The state manages a collection of state parks and preserves and manages several prisons. I consider this to be a fair set of services; I will insist that they be provided within a budget which can be covered by taxes and fees for service; I do not want my state to take on debt. To pay for all these services and more, the state now imposes a tax on income earned by residents. In addition, the state is authorized to borrow through the creation of municipal bonds; this issuance of debt destroys equity, especially since interest paid on municipal bonds is tax deductible; this is a subsidy to lenders and as such is an incentive to lend.

“It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.” Thomas Jefferson

My state has taken a role in local education; I find this objectionable. I expect to have the key role in educating my children, and I will work with the local school to level expectations in that regard. I have no interest in someone from outside the community and the city coming to tell us how to manage local education. Needless to say, for the right to this unsolicited advice, the state takes and spends my money.

Local government

2008-11-29T09:54:00.000-08:00

I will stipulate that local government applies to our city, notwithstanding the obvious fact that not everyone lives in a city or even a small town. I look to local government to maintain the city streets. In my city, most of us send our children to public schools; ideally, my local government sets aside the land, builds and maintains the schools, hires the teachers and service workers, and keeps the public school in my neighborhood operating. And it is my local government that established and maintains a police force and a court system to protect law-abiding citizens and to identify and penalize law breakers. I look to local government for fire protection, and by extension these days, for paramedical care in the event of accident or emergency. My local government offers water distribution and sewage disposal services. I am pleased that my local government supports local libraries which make books, films, recordings, newspapers, magazines, and the Internet available to all, especially to our youngest and oldest citizens.

To secure these services, I am happy to pay my fair share. Let’s stipulate that to raise the money to supply these services, a city government will use sales or property taxes. I want to be well-served, but I prefer not to overpay. There is general agreement that we need some permanent city workers who work directly on our behalf and are empowered to contract for the services we require. We elect a mayor to manage city workers and to assure that the city government functions properly, and we elect a city council to provide representation to several communities. We are best served when these city workers use the principle of free and open competition to get the best possible value for our tax dollars. When these workers are committed to work for the people of the city, this system works pretty well; when they are diverted or corrupted such that they are other than good shepherds of taxpayer money, we are poorly served. It is critical that we demand of our city leaders the highest levels integrity. The equity that city government must build is a well-run, cost-efficient city.

In general, local government has a far greater impact on our lives than state or federal government. Therefore, it is critical to get this piece of governance right. We cannot afford to have the equity in our homes, the education of our children, or our health and safety destroyed by corrupt or inept local government.

Chapter 2: Creating governments which protect your equity

2008-11-26T14:18:00.000-08:00

Having completed the first chapter, and through dedication and investment, you are now or soon will be building equity in yourself and those close to you. However, you cannot do this in isolation. As an American you and I are already part of American society. We need to govern ourselves in such a way that our investments produce the increases in equity that we expect. As it happens, we need government at several levels.

“Whenever the people are well-informed, they can be trusted with their own government.” Thomas Jefferson

Here is a simple, generic example. We need to agree on traffic laws and the rules of the road in order to bring order to the chaos of many people driving cars, trucks, motorcycles, and bicycles in many directions in the same space at the same time. We need to agree on how those laws are promulgated and enforced to ensure that we are all protected. We need to agree on how and when to qualify drivers so that everyone operating a vehicle has been trained and licensed to do so safely. Establishing and enforcing traffic laws is an example of an activity which requires common action – through some type of government – that none of us can do on our own. In the interest of brevity, three levels of government will be addressed, local, state, and federal.

“The rights of persons, and the rights of property, are the objects, for the protection of which Government was instituted.” James Madison

Equities: antidotes to adversity

2008-11-25T07:36:00.000-08:00

If you are investing in your equities and avoiding debt, false gods, and risky behaviors, you are setting yourself up to succeed; just as importantly, you are preparing yourself to cope with adversity. Adversity can visit you from many directions; your investments in diverse equities will serve and often protect you.

“Adversity is the state in which man mostly easily becomes acquainted with himself, being especially free of admirers then.” John Wooden

Your equity positions in the stock market, carefully and painstakingly built over time, can be sharply reduced in difficult economic or political times; this is our year, 2008, of confirmation. And markets don’t always recover quickly or in predictable ways. If you have invested in your health and your career, you should be able to continue to work and earn and fight your way through this type of economic loss.

Your health and capabilities can deteriorate due to illness or injury; in such times, where you face both physical and financial trauma, your family can be a great aid and comfort and your forethought in purchasing insurance, investing in a home, and saving and investing money can help you to pull through.

Your job or career situation may be altered due to outside events, such as the death of an entire industry – for example, fishing – or due to internal factors more closely related to the company that you own or work for. When a career change or a job change is called for, your investment in education will make you valuable in other areas.

Note that little has been said here about retirement. There was a time when work was a “four-letter word,” best put under the heading of “unpleasant necessities;” unfortunately that is still true for many. However, if you have invested in education and a career, you probably don’t look at work that way. I believe that retirement belongs under the heading “false gods.” When you turn 65, or whatever magic age you or someone else has set for your retirement, you will not automatically be ready to leave your job and put your career aside. This idea of saving for retirement and then retiring at some arbitrary age is over-rated. I suggest that you continue to build your equity, and if at some point retirement is right for you, regardless of your age, retire. Even then, continue to invest in all your equities to make your retirement the best it can be.

“You can't help getting older, but you don't have to get old.” George Burns

Equity destroyer: gambling

2008-11-24T08:08:00.001-08:00

Watch out for gambling. Taken as a recreation, with a limited stake, gambling is harmless enough. However, if your expectation is that you will make money (even though you have not invested the time and energy to acquire the skills of a professional), you risk losing more than you can afford. Winnings from recreational gambling are due purely and simply to luck. They are not affirmations of investment and the building of equity. There is nothing at all wrong with a day at the race track and a $2 bet certainly adds interest to a horse race. However, if you find yourself spending every day at the track and your bets are rising, you need to seek help. Gambling has the very real potential to destroy your equity and your life.

Equity destroyer: divorce

2008-11-22T16:37:00.000-08:00

Do not divorce lightly. While there are legitimate reasons for couples to separate and divorce – physical abuse and substance addiction come to mind – divorce destroys equity. It is an expensive process, including the dissolution of a household, possible sale of a home, payment of lawyers and legal costs, and a general feeling of loss. When children are involved, the losses are magnified. Children lose their moorings, are forced to cope with adversity that is not of their making and generally not age-appropriate, and are set back from their peers. Their confidence may be sapped and they may, inadvertently, be forced to choose sides from where they have every right to expect just one team. Conflict often erupts between the parents further complicating the situation, prolonging the agony, and distressing the children. Divorce is a really bad idea - avoid it if you possibly can.

“Getting divorced just because you don't love a man is almost as silly as getting married just because you do.” Zsa Zsa Gabor

Equity destroyer: addictions

2008-11-21T07:29:00.000-08:00

An addiction is an activity that you are unable to control; in fact, the addiction controls you. Smoking is an example. It’s no secret that once you have been smoking tobacco for a while, it is difficult to stop. The reason is that nicotine, the drug in tobacco, is addictive. Once hooked, the smoker’s body craves nicotine on a regular basis. Unfortunately, smoking – a habit which gained world-wide acceptance centuries ago – destroys equity in a number of ways. First, cigarettes (and other forms of tobacco) cost money; the more you smoke, the more you pay. Second, cigarette smoke destroys your health including your lungs, cardiovascular system, voice, complexion, etc. Third, cigarettes are dangerous, often the cause of fires; smokers generally pay higher insurance premiums. Fourth, cigarette smoke is offensive to non-smokers and may set up barriers between you and your friends and family. The list goes on, but the point is that if you smoke, you need to stop. If you need help, get it; until you stop smoking, you will be destroying equity.

As bad as smoking is, there are worse addictions. Addiction to alcohol can rob you of your health, your job, your family, and your life. The same is true for addiction to narcotics. If you have such an addiction, stop reading and seek help immediately. Both your equity and your life are in grave danger. If you don’t kill your addiction, you will be a burden, unable to help yourself or anybody else; then, it will kill you.

If you are a parent, adopt a zero-tolerance drug and alcohol policy for your children. Let them know that any violation will constitute a grave violation of trust and land them in a treatment center. Their lives are at stake.

Equity destroyer: cheating

2008-11-20T08:04:00.000-08:00

Cheating is a terrible habit. It usually reflects a desire to get something that you haven’t earned. There are two critical debilitating results of cheating: first, if you do receive what you cheated for – a higher grade or the position you falsified your resume for – you will never know whether you would have gotten it on your own merits; second, having reached your goal by cheating, you may lack the confidence to stand on your own without it. One day, your cheating will be uncovered and that is likely to destroy even the equity that you have earned through honest investment.

Sometimes, it is easier to moralize than to be honest. I am not a football player, but I enjoy watching the game. At the higher levels of football, there is a play that I have observed that can only be accomplished between two very talented athletes, a passer and a receiver. It is a downfield pass, thrown low and generally towards the middle of the field, somewhere in the range of 10 to 25 yards. The quarterback, under pressure from the defense, must deliver the ball high enough so that the receiver can catch it and low enough so that the ball cannot be intercepted. The receiver, must reach the pass, catch the ball, and retain possession even as he is falling to the ground.

When executed correctly, this play is a thing of beauty and generally results in a good yardage gain. Both passer and receiver are recognized by their teammates as having advanced the cause of the entire team. However, there is no margin for error. It is a difficult play for a referee to judge because he may not be properly positioned to tell whether the receiver actually caught the ball or whether it hit the ground before the receiver secured it. The team is so dependent on the success of such plays and the rewards for success are so high that I have never, ever seen a receiver admit that he did not really catch the ball. I’m afraid that it is understandable, but it is also disappointing. When the catch was not made but the play was called successful anyway, it feels like cheating to me.

“What you are as a person is far more important that what you are as a basketball player.” John Wooden

Equity destroyer: poor driving

2008-11-19T07:57:00.000-08:00

Be a good driver. Many of us depend on our cars to get to school, work, services, shopping, etc. The car, a convenience of the modern age, greatly increases our mobility and range. For most Americans, the car has long since passed from convenience to necessity; this is confirmed by the number of cars on the road. As convenient as it is, driving is also the most dangerous thing that most of us do on a daily basis.

Observe traffic laws; generally derived from the bitter experience of others, they are meant to protect you. Observe the speed limit, follow the car in front of you at a safe distance, signal when you turn or change lanes, and be courteous. When another driver needs to move in front of you, be helpful so that he can change lanes safely. Courtesy is generally synonymous with safe driving. Plan your route before you start your journey. Knowing where you are going will allow you to predict transitions and to be predictable.

As a driver, you have taken your life, the lives of those in your car, and the lives of your fellow drivers into your hands. A traffic accident, even under today’s conditions of ever-safer cars and highways, can destroy, in an instant, all the equity you have built; don’t let it happen. Be vigilant, be courteous, and be safe.

Equity destroyer: winning, a false god

2008-11-18T07:58:00.000-08:00

Beware of the false god, winning. Winning a contract in business or winning a sports competition can be highly satisfying as a confirmation of your investment in your business proposal or your sport. However, if you make winning the goal, you run the risk of devaluing the equity; the key to increasing skills is improvement. As you invest in your career and job, you will increase your capabilities and your value. If that improvement means that you can offer your customer better value than a competitor, you may be rewarded with a contract. If you win the contract, after upgrading your value to the customer and writing an excellent proposal, you may take winning as an indication of that. However, don’t confuse winning with improvement. If you don’t get the contract, the competition may still be stronger than you. If you do get the contract, it might just be that the competition was light or even absent.

Sports teach us some wonderful lessons about investment, improvement, and winning. Tennis can serve as a good example. If all I care about is winning, I can simply choose a weaker player for my opponent. By contrast, if I care more about improving, I am better advised to seek out opponents whose game is stronger than mine. If I use that approach and I am fortunate enough to win, the victory actually holds some value.

“Just play. Have fun. Enjoy the game.” Michael Jordan

Equity destroyer: debt

2008-11-17T12:26:00.000-08:00

Minimize debt; the “anti-equity.” Save, rather than borrow, to meet your needs. Borrow only that which you can repay completely in a fixed amount of time. Lend only that which you can afford to lose; unless you are a bank, you will not enjoy collecting on your debts. Does this mean that you should never borrow and never use credit or credit cards? No. Credit may be perfectly appropriate to bridge financial gaps in your business while you are awaiting payment for goods and services; secured credit, backed by collateral such as accounts receivable, may be appropriate. Taking a mortgage to buy a home is quite normal; just be sure that you can make the payments and that you have equity in the home. A credit card, whose balance you make good each month, can be a convenient substitute for the large amounts of cash you might otherwise have to carry. A car loan which allows you to purchase a safer or more economical car than you can afford at the moment might be prudent as long as repayment can be swift and sure.

“What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?” Adam Smith

What you have to invest - money

2008-11-16T11:54:00.000-08:00

Money is both an equity and a resource for investment. Of course, you have to acquire the money. Unless you are an heir, you will generally acquire your first “serious” money through working. You can use money to invest in equities such as stocks and real estate. You can invest in education and health, where money is necessary but not sufficient. Money allows you to pay your college fees and buy the course textbooks, but unless you invest the time and energy to study, education and knowledge are unlikely to result. Likewise, you may buy health insurance, but that will only help you pay your bills after injury or illness.

“Focusing your life solely on making a buck shows a certain poverty of ambition. It asks too little of yourself. Because it's only when you hitch your wagon to something larger than yourself that you realize your true potential.” Barack Obama

Money is not the sole measure of prosperity, but money is necessary to a prosperous life, that is to acquire the equities earlier. There are bookshelves filled with approaches to increasing your net worth. Here are three fundamental suggestions. First, become gainfully employed. At whatever stage of life you are, understand your strengths, what you can do as a private entrepreneur or as a worker in someone else’s business, and seek to profit from your work on behalf of customers. Second, set aside as much of your earnings as you can after you have met your basic needs for food, shelter, utilities, clothing, transportation, healthcare, etc. The money you set aside should be seen as your true earnings (pay minus expenses) and represents real equity. Third, as appropriate to your situation, invest your money to gain further equity.

Stock market investing is an example of investing money to build equity. When you own common stock in a public company, you have equity in that company; in other words, you own part of the company and are entitled to dividends, votes (one per share) in corporate policies, and any proceeds from the resale of your stock. When the company is building equity, the value of your investment appreciates. There is a wealth of information available these days in the public domain – internet, news media, television, etc. – to inform you about public-traded companies. I suggest that, if stock-market investing attracts you, that you invest in companies with strong balance sheets, whose cash and resources are growing relative to any debt, and which return a reasonable fraction of the profits to shareholders in the form of dividends. If both the profits and the dividends of the company are growing, your equity is likely to increase regardless of underlying economic conditions.

Buy a stock when the price is reasonable (properly reflects underlying value) and hold it for the long pull. Warren Buffet did not get rich by trading stock; he did it by investing in good companies which build equity. As it happens, now (mid-November 2008) appears to be a good time to begin investing in stocks; unfortunately, the last six months has been a poor time to be buying stock and December and January could turn out to be even better times to buy. Predictions are generally risky, but if as I expect, you and I will rescue our currently troubled economy, the shares of very good companies are likely to rise from currently depressed levels. Admittedly, nobody knows just when that return to health will occur.

All spending reduces the amount of money you have, however, debt poses the greatest risk. Take all prudent measures to avoid debt; the opposite of equity. Debt should be taken on only after the most careful consideration. For example, I do not borrow money to buy stocks (known as buying on margin) and I do not recommend it.

“Labour was the first price, the original purchase - money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased.” Adam Smith

What you have to invest - time, energy, creativity

2008-11-15T08:38:00.000-08:00

Your time is a limited, precious commodity. To have any chance of meeting your have many investment goals, you will have to manage and spend your time wisely. Two techniques appear to work well in this regard. First, set priorities. All the things you need to do are not equally urgent or important. Make decisions and assign priorities to the actions you need to take to meet your goals. Be sure to include important activities, such as investing in your health, even when they may not appear urgent. Second, draft schedules. Time is linear; most of us can only focus on one activity or investment at a time. Scheduling your activities and then following your schedule, with modifications as necessary, frees your mind from the things that you need or want to do but are not currently doing. There is no need to feel overwhelmed by all the things you need to do because they’re on your schedule; you’ll get to them in good time.

The opposite of investing time is wasting time. As we pursue the serious business of building equity, we use considerable energy. Therefore, it is not surprising that we sometimes need recharging and refreshment. Even passive diversions, such as listening to music or watching television, can be relaxing and refreshing. One way to measure whether you are recharging or simply wasting time is to use your schedule. Understand your need for diversion and schedule it in. Of course, diversion need not be passive. An afternoon on the tennis court generally demands a serious investment of energy and intensity.

“Time is the coin of your life. It is the only coin you have, and only you can determine how it will be spent. Be careful lest you let other people spend it for you.” Carl Sandburg

Your investment of time is likely to yield meager results if you do not also invest energy, creativity, intent, and persistence. Making meaningful investments in each of the equities described above requires energy, to take the actions – studying to further your education, communicating to level the expectations of family and friends, planning to be successful in your career, etc. You will need to be creative if you want to please your family and friends, distinguish yourself from your peers on the job, or make a sale. If you are to carry out your plans, you will need intent to stay on task and to get results. If you are to maintain good health, you must persist in eating the right foods and exercising regularly.

Equity 10: Physical Assets

2008-11-14T07:52:00.001-08:00

Physical assets such as a car, clothing, furniture, etc, may be necessary, but they all cost money. Spend your money wisely; look for value; and avoid debt. Personal note: I bought a Honda Accord in 2005 after having driven the same car for 30 years. Since, living in Southern California I cannot conveniently escape the need to drive, I sought out a reliable, efficient car. Low maintenance costs and a 5-speed manual transmission that delivers 30 miles per gallon in town and 35 miles per gallon on the highway have confirmed my choice. Buy what you need, keep it in good condition, and make it work for you.

Chances are you will invest your time and effort not only those things you might purchase, such as a house or a car, but in creating the things themselves. These may result from skills which you apply to build furniture and cabinets, create works of art, plant and tend to trees, flowers, and vegetables, and so forth.

“The meaning of things lies not in the things themselves, but in our attitude towards them.” Antoine de Saint-Exupéry