Saturday, March 07, 2009

Response to a Reader Re: the Economy

My compliments to Rolando for a thorough and thoughtful response to my posting. My responses follow. I do not guarantee that they will satisfy, but they are an accurate reflection of my views.

Do you understand inertia? Obama has ONLY been in office 1 month. If you were trying to stop a speeding car it would take time to slow it down, and vice-versa.
Okay, I did correct myself later on and ask “At what point can the voters make him accept responsibility?” I got weary of the Bush-bashing for 8 years, which started from the moment he was finally declared to be president (“selected, not elected”) until the day he was booed on Obama’s inauguration day. However, as I note elsewhere, Obama is now saying and doing things that are actively making things worse. That’s why he’s got to take some ownership.

The RIGHT "incentives" make the economy better. The RIGHT "reduction in regulation" and the RIGHT "tax-cuts" help make the economy better. Giving tax-cuts to companies who outsource the work, does not "maximize the opportunity of [American] citizens". It does not create jobs.
No, see, this is one of those fundamental differences between believers in government intervention and those who mistrust it. There are always people in government who think they can do things better if only THEY were put in charge. Capitalist economies work best when government allows the "invisible hand" of the market to do its job, or if it “is performing basic research (e.g. in NASA labs and at universities), being an early adopter of new capabilities (e.g. airmail service), building infrastructure (e.g. roads, seaports, launch facilities), and regulating health, safety, and consumer protection.” (See Eligar Sadeh’s Space Politics and Policy: An Evolutionary Perspective or Adam Smith’s The Wealth of Nations)

Government starts getting bigger, more intrusive, and less effective when they try to pick favorites in the marketplace. Ronald Reagan crystallized the problem well: “If it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidize it.” This is the general cycle of government intervention in the market. A great example is transportation: government went crazy helping canal companies, giving them all sorts of perks and benefits and special incentives to build, operate, or expand canals. Then canals got supplanted by railroads, and government had to subsidize canals until they died out because they couldn’t compete. Railroads went through a similar cycle until the arrival of airplanes and trucks on the interstate highway system. And now airlines are on the verge of being subsidized—with nothing to replace them, incidentally.

And for the record, I would not support cutting regulations that allow more fraud; however, I would support cutting regulations that make business unnecessarily expensive, like EPA, Sarbanes-Oxley, or ADA. Companies can do these things if they choose and are found to be effective and create goodwill with their customers, but sending in a bunch of auditors and examiners to intrude on the operation of a business expands the power of the government with very little good shown to the public.

As for the “right” tax cuts, the only entities who truly pay taxes are individuals. Businesses don’t pay taxes, in the pure sense—they pass on their tax burdens to the customers, who, at the end of the day, are people. So raising taxes on businesses hurts individuals, not businesses, except to the extent that they have to raise prices on their customers to pay for higher taxes. The only "fair" thing left to do is cut individual rates across the board and let those who are able to benefit, do so.

Also, as I’ve noted in other postings, nearly half of the working public doesn’t even pay income taxes—they get a full refund at the end of the year via the Earned Income Tax Credit or other handout programs. And because the U.S. has a “progressive” tax system, that means that the more money you make, the higher your tax rate. So one might play the class-warfare game all day, but the very nature of our economy and tax system is such that only “the other half” truly benefits from a tax cut.

One thing that many people who lean conservative don't seem to understand is that the American Market is not very lucrative for investment. We are too expensive in comparison to other countries such as China and India. They are just as just as bright as we are and they are a fraction of the price. If my goal was to maximize profit, I would not hire Americans. I'd sell to them, but I wouldn't hire them. Now I am an American, so MY thoughts are for Americans -- but hardcore business executives are ruthless AND the best strategy when pursuing MONEY is to hire outside of America. Hence, tax cuts for very large organizations is not necessarily good for Americans because when these business people invest they won't invest in America.
I actually have no problem with a general, low tariff on American goods, matched by a tax cut for American citizens. That protects American jobs and keeps more people off the welfare rolls. Of course there is the risk of other nations putting up protective tariffs as well. There are ways to lower American labor costs, but they require doing things like breaking the power of unions and reducing the number of government-mandated costs, like FICA, OSHA, EPA, etc. (see above).
I agree (to an extent). I think that providing people with benefits is important to prevent these people from making the mortgage problem worst, but I agree it motivates people to not work. That is why if I were setting the rules I would require these people to do a minimum of 10-15 hrs of volunteer work per week. This way, the people have enough time to find a job and they are giving back to the community in a positive manner.
Fine by me.

Company bailouts makes me cringe. These company CEOs are either incompitent or highly dishonest -- both possibilities upset me. However, if these companies go down - then many people will lose their jobs -- and it isn't an isolated event -- there is a domino effect. I hate it -- Do you have a better approach? -- I would bailout these companies, but arrest the upper management -- have them help fix their mess in prison. Unfortunately, these people have ALL the politicians in their pocket books -- this isn't a Democratic or Republican issue -- they are both corrupted.
A few firms fail in every recession, and people go on to look for jobs at companies that aren’t incompetent. The unemployment rate was about 6.1% at its worst in the ’01-’03 recession and a shade under 8% in the ’91-’93 recession, and neither event prodded the government to go bonkers with spending, intervention, and the rest—and the economy recovered. Bottom line on this: capitalism is a competitive environment, and guaranteeing employment has never been part of the American social contract.

As far as arresting corporate officials, if they’ve committed crimes, fine. Arrest them. If, however, the things they’ve done are legal under the system as currently described, then they go free.
I don't think helping people who were mislead by predatory lenders is wrong. I think it is a very good and proactive idea. It is either this, or you let them foreclose and we pay for it through another method -- by bailing out the banks again :).
I cringe when I hear things like “predatory lending practices.” If you know you can’t afford something, like a house, you have an obligation to yourself and your family to look seriously at your financial standing before making a huge purchase on credit—especially one where the lender tells you that the rate is subject to change as interest rates fluctuate. That’s like going to a loan shark and expecting leniency. This latest crisis, however, has soured me on real estate as an “investment,” possibly forever. We had a financial crisis in the late ‘80s when the congress made a bunch of tweaks and changes to the tax code (wanting to get the RIGHT incentives passed, you see), like reducing the mortgage deduction. A bunch of people started bailing out of their homes, savings and loan institutions went under, and BAM! $190 billion went up in smoke…history repeats.

Now here is where I need your intellect to get a better understanding of things from conservatives. Now you don't talk about the positive things that Obama is "spending" on like Education, Green Technology, Infrastructure and Lowering Health Care Cost. All these efforts, if done correctly, provide jobs now AND make us more competitive tomorrow. Now how can this be bad? I really want to know what the grievance with these type of "investments" from the conservative side. I mean the "teaching someone to fish" is at the very core of conservative beliefs (I know I was brought conservative and I am an independent not a democrat) -- why then is investing in education labeled as "spending"? -- I simply don't understand. Why is investing in new industries like "Green Technology" labeled as "spending" when it is known that we are running out of oil reserves? It creates jobs NOW and it is an investment for the future. Why is investing in the Health Care technological infrastructure in order to Lower Health Care Cost considered spending? It lowers long term costs and it creates jobs NOW. (Now I think that there is support for this on both sides -- so I might be misspeaking.) -- However, to play the devil's advocate the conservatives are going to try and deregulate the Health care industry in the name of "competition" (being advised by people in the health insurance industry -- of course) and the only thing that is going to happen is health care costs is going to increase. Now to be fair I am certain that the Democrats will F'it up too, but I think that their approach will be more conscientious -- so I expect it to be slightly better -- I hope. Now I agree that some of the things that are on the bill are wasteful -- That is politics -- you work at NASA so you should understand politics. However, the PLAN in general is not bad. The litmus test is for stimulus items is 1) Does it create jobs now? 2) Does it create more opportunities or lower long-term costs? If both these things are yes, then it is a good stimulus item. If it does not it is pork.

As I noted above, government does some things well, like fighting wars, maintaining law & order, building infrastructure, and funding basic research. Where it gets into trouble is in trying to do things that individuals or businesses have proven time and again they do better themselves, like insurance, education, performing applied research, space exploration, and running businesses.

My gripes with “investments” (subsidies) targeted to specific applied technologies is that it amounts to corporate welfare and picking winners and losers. The Obama administration is so convinced that “green” technologies are the way to go that they are willing to regulate existing industries out of existence like coal and nuclear fission and neglecting options like improved fission reactors, space-based solar power or helium-3 fusion.

I have friends who tell me they are perfectly happy to pay more taxes if it means that everyone gets “free” medical coverage. Yet it never escapes my attention that when rich or powerful people need a critical operation, they come here, they don’t go to Britain, France, or Canada, the primary exemplars of socialized medicine. Why? Because they can get the procedure right away, and they value the quality of care. That system has been built capitalistically, not socialistically, and the horror stories of waiting lists and rationing are legion. I do agree with one of the friends I’ve talked to about this (Doc, a regular reader): scientific, factual studies of waiting lists and quality-of-care issues need to be done, here and abroad. As far as I can tell, much of this war has been fought anecdotally. However, until I’ve gotten serious evidence of the benefits of government-funded and run health care, I’m dubious about the proposition.

There’s also this: government is not going to have plans as good as private ones. Taxpayers simply can’t afford for everyone to have a “Med-90” plan (the 90% coverage plan I used to have with Disney), which of course is what everyone would want. You could use the same argument with unemployment or welfare insurance: if the government ensured that everyone made at least $100,000 a year, who’s going to pay for all that, and if it was affordable, why would people ever work again? And with more government intervention in the medical process, you would end up trading one set of constraints with another: instead of money being the deciding factor in some medical decision, it could come down to a legal or political decision. We already have too many lawyers involved in medical decisions, and congress is made up mostly of lawyers.

I’ve been told that “pork is in the eye of the beholder.” Science and space spending tend to fall under this definition. I would say, however, that basic research and exploration are valid function of the American government, and have been since at least 1804. Once the basic research work is done by NACA/NASA, it should be transferred to the private sector, where competition, innovation, and economies of scale can be better brought to bear. Also, basic research—understanding the properties of the physical universe—has become a basic function of government since the decline in private foundations and the increase of government-funded research after World War II. Private-sector companies might or might not participate in basic research, but the understanding should be that basic facts about the universe should be known and free to all. What individuals choose to do with those facts once they’re known is the job of the private sector. This is not some whacko conservative notion, it’s in the Constitution:

Article I, Section 8 of the U.S. Constitution empowers Congress “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.”

In other words, the U.S. Government has as part of its basic operating instructions to protect patents and copyrights for applied research, inventions, and ideas. It doesn’t say anywhere that the government is required to or responsible for paying for those inventions or ideas.

And I think you're wrong about your "litmus test." The ultimate test of a stimulus should be how much private sector activity is generated, not government activity. Jobs can always be found, but the private sector has always been more lucrative in this country. If a "stimulus" creates a bigger, more expensive government, more people beholden to the government for their livelihood, more long-term debt, more taxes down the road, and more intrusion into people's private or financial lives, the cost is too high.

Sorry this is so long, and I probably didn't answer all your comments, but I addressed as many as I could. I hope this answers your questions. Thanks for reading.


Rolando said...

Thank you for the response. In general conservatives tend to dislike "big" government, but are okay with big business. I fear big government, but I fear big business more. In America those who have the money make the rules. What those companies that are being bailed out did was unethical -- and they new it -- but it will be very difficult to prove that what they did was against the law -- because they helped write the law. Now unethical does not necessarily equal unlawful -- for big companies it usualy doesn't. Now in general I am not against big companies - they are necessary -- but I am against any special interest group having too much power. That being stated neither Republicans or Democrats limit or even try to limit special interest groups -- they just have different groups they cater too.

Now we can both agree that small business is the fundamental driving force of the American economy. What I believe that American government should do is increase the ease in which small business can develop. However, any business will not do. The business must be high-tech and progressive -- white collar jobs. Making it simple to start a diner doesn't help the economy. This is where Web 2.0 and Web 3.0 technologies come into play.

RE: My gripes with “investments” (subsidies) targeted to specific applied technologies is that it amounts to corporate welfare and picking winners and losers. The Obama administration is so convinced that “green” technologies are the way to go that they are willing to regulate existing industries out of existence like coal and nuclear fission and neglecting options like improved fission reactors, space-based solar power or helium-3 fusion.

I think that the problem with Oil and Coal industries is that they emit Carbon and that causes Global Warming. In the past manufacturing companies disposed their waste in ponds, rivers, lakes to save money. These actions caused problems to the environment and people who were exposed to the water. Now back then "big" government forced legislation that caused increased cost to the business by making dumping waste in public water sources. Today, we accept that this legislation was necessary. We face similar legislation with carbon emissions today. We can charge these industries now, or pay for it later.


If you read some of my posts/comments in you will realize that most of my proposals are meant to increase the capabilities of the private sector -- but not necessarily big business.

Bartacus said...

You should fear big government more, IMHO. Government can close, seize, micromanage, or force businesses into bankruptcy. Business cannot do the same thing to government.

Rolando said...

Valid point. However...

I see government as a puppet, and big business is the puppeteer. People vote, but the choice is limited.

Usually, when government forces a business into bankruptcy it is "big business" using their power to enact laws that make it more difficult for others too compete with them. I take that back, it is special interest groups that do this ("big business" is a subset of special interest groups - a large one).

I agree that big government is bad, even if well intentioned, because it has a tendency to become very inefficient. However, we are given two choices, Republican and Democrat, which are both big government. Neither is less government, no matter what they say -- they just like different big government.

Here is a link that shows the National Debt per GDP vs time.

I still don't know what to make of it, but it is counter-intuitive.

Other things...

Have you heard about "social business"? It is a new economic theory conceived by Muhammad Yunus. This is what our government has to start supporting.

"A social business is one which aims to be financially self-sufficient, if not profitable, in its pursuit of a social, ethical or environmental goal." --

What do you think?

Bartacus said...

I will look at this tomorrow. I got in late.

In the meantime, keep in mind why I distrust government more: business might influence, lobby, or (in some nastier cases) bribe government officials to go one way or another. However, the bottom line on power is still who controls the guns and the laws, and that is the government. Businesses might influence this or that decision, but they cannot use force to ensure their wishes--at least not legally. Only government is empowered with the legalized use of force.