Leonard Letter Articles on Economics – 2004-2008

“Who Should We Believe on Jobs?” – June 7, 2004

Last fall critics compared President Bush’s performance on job creation to that of Herbert Hoover.  The numbers coming in since then are blowing that comparison out of the water, but the discussion has led many to more closely scrutinize the two ways that the Bureau of Labor Statistics counts jobs.  The most widely used and referenced number is called the Establishment Survey.  It is derived from payroll data that tracks 400,000 business establishments.  The other is the Household Survey of 60,000 households.

 

The payroll survey tracks employment from the employers' perspective, which measures the number of workers in each industry, their hours and wages.  The household survey looks at jobs from the workers' point of view, which tracks the employment rate for various demographic groups.  Although the sample size is smaller in the household survey, it may be more accurate in the new economy.  One difference is that it counts agricultural workers, and most important, self-employed workers.  I think this is a very important segment of the economy to track, especially in a recovery when there are so many start-ups, which are not reflected in the payroll data.  Not to mention the growing "E-Bay economy," plus the growth of other types of self-employment, like consulting.

 

In March, the political ramifications of these two methodologies was obviously important.  The payroll method suggested that 59,000 jobs had been lost per month during Bush's presidency.  The household survey, on the other hand, after being adjusted down for population growth, suggested the economy had gained an average of 6,000 a month during the same period.  Both numbers have significantly improved since.  But Dems have been busily panning the household survey because it has thus far made Bush look better. 

 

“Don’t Let Them Work on Your House Without It” – July 5, 2004

A friend of mine and loyal Leonard Letter reader recently received some complaints about his ad for landscaping services.  One of his ads pictures a work shirt with a contractor’s state license pocket card coming out of the pocket.  The caption says, “Don’t let them work on your house without it.”  This is his attempt to discourage the underground economy.  Many people think they are simply getting a good deal when they use unlicensed contractors or landscapers.  They may be paying less up front, but they are not getting a good deal.  That unlicensed handyman is paying not paying taxes on his supplies or his employees, is avoiding workers’ comp premiums and general liability insurance and is also dodging many of the other costs that every legitimate business person has to meet.  Such underground workers damage those who follow the rules and obey the laws.  I encourage you not to let anyone work on your home or yard without checking for his or her license and business reputation, and I commend my reader for fighting against the underground economy that threatens so much in our state.

 

“American Productivity Is Soaring” – July 12, 2004

Last week I read a thoughtful Tech Central Station column by Arnold Kling that lays out what might be the most under-reported story on our economy. (See this link for the full story: http://techcentralstation.com/070804D.html)

 

Kling reports on the startling four-year increase in the productivity of the American workforce.  He calculates productivity by using the Bureau of Labor Statistic’s output per hour in the nonfarm business sector.  Between 2000 and 2004, America experienced an astonishing 17% increase in productivity.  This is the best increase since the 9% gain between 1972 and 1976.  It even beats any eight-year period since 1976.

 

Kling goes on to argue that this measure is the basic determinant in our standard of living.  He sees high productivity as a defense against outsourcing by making America more competitive.  He contends that increased productivity helps pay for massive national commitments like Medicare and Social Security.  He even makes a case that high productivity is good for the environment because countries with more wealth can afford to develop cleaner technologies. 

 

The reason for this increase?  Kling believes it is the promise of the Internet and computing age finally being realized.  Computers have finally become powerful and cheap enough that companies can collect the data and put in place problem-solving solutions that deliver much greater efficiencies into the marketplace. 

 

I would love to hear from all the economists out there (armchair or professional) on other theories of the startling increase in America’s productivity.

 

“Outsourcing, Another Perspective” – July 26, 2004

The issue of outsourcing continues to generate controversy.  As you read here last week, some Democrats even want to make the practice illegal for state government services. Some believe that when Americans lose jobs because foreign workers are willing to do them for less money, we lose.  It is difficult to argue to those who lost their jobs in this way that there are benefits to this kind of economic dislocation.  But to illustrate that there are benefits, it is helpful to look at how our own economy has been changed by job displacement in the past.

 

Looking through the 2003 annual report of the Federal Reserve Bank of Dallas, I read a wonderful article titled, “A Better Way, Productivity and Reorganization in the American Economy.”  The article points out that if you compare America today with earlier times, the inescapable conclusion is that the lives of Americans continue to steadily improve.  There are many reasons for this, but in general, because companies have been able to achieve greater efficiencies at the microeconomic level, they have unleashed a power that has transformed the economy at a macro level.  For example, in the 18th century, 90 percent of Americans worked on farms.  New technologies and innovations caused a huge displacement of these workers from farms to cities.  Government did not respond to this by outlawing the cotton gin or other farm equipment.  The result was the rise of jobs in retailing, medical care, finance, and a host of services in America’s cities. 

 

This transformation continues today.  According to the Fed, there are 182,000 fewer farm workers in American in 2002 than in 1992.  There are also 347,000 fewer sewing machine operators, and 1,305,000 fewer secretaries and typists.  To some, this is grim news.  But look at the fields where America gained jobs.  In 2002, there were 248,000 more financial service employees, 512,000 more registered nurses, 230,000 more designers, 147,000 more electronic engineers, 59,000 more actors and directors, 49,000 more photographers.  What the Fed is pointing out is that the awesome rise in productivity in America is allowing our society to climb a hierarchy of human talents.  This means that as long as we continue to allow the economy to evolve by reacting to  market forces instead of political ones, we will continue to add jobs that use analytic reasoning, imagination, creativity, and people skills.  This is the kind of economy that enables our kids to live better and have better jobs than we have had. 

 

Clearly, human freedom in general, and free trade in particular, are not the enemy of the American workforce, but are essential for an improving economy and a better way of life for our citizens.

 

 “Economy Starting to Accelerate” – August 16, 2004

The preliminary data from the BoE for the first quarter of 2004 taxable sales shows that California businesses completed approximately $110.8 billion in transactions subject to the sales and use tax.  This is an increase of 6% over the first quarter of 2003 ($104.5 billion).

 

The increase in first quarter sales figures marks the largest increase in taxable sales since the fourth quarter of 2000, when an 8.7% increase was reported over the prior quarter.

 

These figures are not final, but nonetheless offer an encouraging sign the economy is vibrant.

 

“Household Survey Shows Huge Employment Gains” – August 30, 2004

You may have recently heard the figure that only 32,000 jobs were created in America in July and this is a sign the economy is wavering. However, this measure of the economy uses data provided by employers only. Another measure of employment is called the Household Survey - this does a better job of including those who are self-employed. This survey indicates that a whopping 629,000 new jobs were created nationally in July. Both sets of data are provided by the Bureau of Labor Statistics and can be found here: http://www.bls.gov/news.release/empsit.nr0.htm

 

I have written on this topic fairly frequently over the past few years. There is a wonderful economic evolution taking place in America where people are finding it easier and easier to make a living by working for themselves - despite the myriad ways which government makes this difficult.

Those politicians and media reps that ignore the household data are basically saying that workers like real estate agents are not really working. It is not just the professional Ebay users that are not being counted. The monthly employment data is big news - but perhaps the bigger news is how the media and the political class are ignoring a massive transformation of the American economy.

 

“Edelweiss Memories” – September 7, 2004

Governor Schwarzenegger is being hit with a cheap shot by the liberal press.  They are saying he made up his memories of life in Austria under socialism.  The so-called experts say that Austria was not socialist in the 1960s.  I am not an expert on the economic history of Austria, but I am willing to bet any of these “experts” that they are wrong.  Socialism is a government controlled central economic planning system where the government owns the country's productive industries.  Most European countries retained ownership of the economy in the aftermath of the National Socialism of the Nazis and the advancing “people’s” socialism of the communists.  Typically, the government ran the telephone, telegraph and energy systems, including electricity, gas, and petroleum products.  Mineral extraction, metal production, and even finished products like automobiles were run under government ownership.  The government of Austria may have called itself conservative, but that word meant something very different in Europe in the 1960s than it does in America today.  The Governor was insightful as a young man to recognize the harm that a centrally planned economy causes and saw America as the shining light that offered opportunity to everyone regardless of his or her status with the government.

 

 

“Economic Vitality Questions” – November 15, 2004

Governor Schwarzenegger has declared himself to be a man of action.  One of the ways he is demonstrating this is by asking his advisors to think about what California should look like in 20 years and what policies can lead to the capital investment necessary to get us there.  To help answer these questions, the Governor’s cabinet secretaries are touring the state, holding conversations with business, political, educational and community leaders to get their input on each region’s priorities for economic vitality.  The cabinet secretaries are posing three questions to participants in these discussions and I want to ask those same questions of Leonard Letter readers.  Please share with me your answers to these questions:

 

1) What actions will have the most immediate impact on California's economic recovery?

 

2) What state actions will result in the most significant long-term improvement to California's economic competitiveness and comparative advantage?

 

3) How do we best structure an effective partnership between the regions and the state around economic strategy?

 

“Economic Freedom….Not So Much in CA” – November 29, 2004

The Pacific Research Institute recently released its U.S. Economic Freedom Index.  It is not surprising to anyone doing business in California that we rank at the bottom, 49th out of 50 states, with only New York less free.  The Index was created by analyzing states’ fiscal, regulatory and judicial policies, the size of government and welfare programs.   Rather than just lamenting our poor showing, policymakers can learn from the results. PRI notes that the study shows “a 10-percent improvement in a state’s economic freedom score yields, on average, about a half-percent increase in annual income per capita.”  Thus, if every state had the economic freedom of the number one ranked state-- Kansas-- the annual income of an average working American would rise 4.42 percent, or $1,161.  PRI notes that would give people an additional $87,541 over a 40-year working life.  Imagine what that income growth could accomplish in California. Are our policymakers listening?

 

“Economics 101” – December 13, 2004

The San Francisco Chronicle featured a report on Friday from the Mortgage Bankers Association that the percentage of California homeowners behind on their mortgage payments in the third quarter is at the lowest level in 25 years.  Same for the foreclosure rate.  I suppose history could record these times as the last of the real estate bubble, but I doubt it for two reasons.  First is demand.  California's Department of Finance estimates we have been underbuilding residential housing by at least 100,000 homes per year over the last decade.  That is a lot of pent up demand.  Second, I contend that Americans are a lot smarter than the experts give them credit for.  People sense we are entering a major inflationary cycle.  We also have historically low rates.  What is not to like about buying a home -- even at a premium price -- in an environment such as this?  Given the phenomenal growth in credit products and the extraordinary access ordinary Americans have to large amounts of credit, declining delinquency and foreclosure rates would seem counter-intuitive.  These stats should be seen as a very big story.

 

“More Economy New For the Holidays” – December 20, 2004

More interesting news from the Federal Bureau of Labor Statistics.  Their December release shows a great divergence between the household survey numbers and the survey that tracks company payrolls.  The payroll method is also called the establishment survey; this has long been the most widely trusted number. The establishment survey indicates we only created 112,000 jobs during November.   According to the household survey, which relies on calling households and asking people if they are working or seeking work, 439,000 new jobs were created in November. What accounts for this divergence? 

 

Consider that the payroll survey does not count independent contractors, or others who are self-employed, the household survey may be more accurate.  There is a growing chorus of economists who believe the payroll survey is losing track of workers because it is not capable of tracking the explosion of self-employment made possible by technology. More and more people are finding ways to shun the kind of traditional work roles the payroll survey tracks.  A summary of the federal data is available here: http://www.bls.gov/news.release/empsit.nr0.htm


“Economic News” – January 3, 2005

Another interesting take on December’s job report from the Federal Bureau of Labor Statistics is offered by Gene Epstein at Baron'sOnline.  Epstein notes a stunning change in the unemployment numbers.  The Bureau reports that the nation's unemployment rate (payroll survey) in November ran at 5.4%, down from 6.3% in the middle of 2003.  Both the main stream media and Wall Street looked at fed's report and the number of jobs created and decided 112,000 new jobs was anemic.  The stock market sold off on the news.  Epstein believes these “sluggish” numbers foretell a significant demographic trend-- not because the economy is lethargic, but because fewer Americans are interested in working.  Remember, the unemployment number indicates the percentage of Americans who are actively looking for a job that have not found one.  It does not count those who do not want a job.  Epstein found that the number of people in America who are not in the labor force by choice is at 34% -- a 16-year high.  Thus, the share of Americans looking for work is no higher now than in 1999-2000.  The old rule of thumb was that the economy needed to create at least 150,000 new jobs every month to keep the unemployment rate from rising.  According to a study by the Atlanta Federal Reserve, the bar is now only 98,000 new jobs a month needed to keep employment steady.

 

According to Epstein, there is more than one cause of this voluntary exodus from the labor force.  One thing is that more people in the 16-24 year-old group say they are going to school instead of working.  Also, more women are spurning the workplace for home.  By 2002, the child-bearing rate among 30-44 year olds was up 23% from 1995.  Whatever the reasons, this signals an increasingly prosperous America that can afford to spend more time on activities outside of work.

 
“Governor’s Reforms: Public Employee’s Pensions” – January 24, 2005

 The press has missed one important aspect of the pension reform debate. The press has compared the Governor's reform on public employee pensions to the President's reform on social security. While both are addressing the bump caused by baby boomer generation retirements, they are two different plans. Whether or not the government employees’ pension money investments are controlled by the employees directly in the form of some privatized plan or by the pension board of trustees as is currently done is not the real issue. The issue is defined benefit versus defined contribution. Defined benefit is the nature of the current public pension system. You get a pension developed by a formula that has nothing to do with the amount of actual dollars paid into the trust fund by you or your employer. Obviously this means that employees never have to pay for increases in benefits.  Further, since the pension is a contract, the entire state of California budget could go in the red by billions and that pension obligation would still be owed.

A defined contribution plan is what the Governor is proposing. Employees put in their money, state government puts in its share, the money is invested by the trustees, and when the employee retires this entire amount -- whatever it is -- will be paid back to the worker. If employees want bigger pensions they can either: increase their own contributions, bargain under the labor contract for government to increase its contributions, or urge the pension trustees to make better investments that will return the most money when they retire. In this way the pension fund is never out of balance and all the incentives are for the money invested to grow for the employees’ benefit.

This is the only fiscally responsible pension plan and should be considered with all of the other budget balancing efforts. One last twist: because pensions are a contract with employees, the new defined contribution pension proposal would apply only to new public employees.


“A Good Read: Sowell’s Applied Economics” – March 21, 2005

Having concluded with the list of best American biographies from Human Events Online, my book recommendations will move to the category of economics.  Now, I know that to many the mere mention of that subject sounds boring.  However, there are several excellent books about economic issues that are far from droll. In fact, if high school and college economic classes could be taught in the relevant, interesting manner of these books, then our population would be much better equipped to handle their own personal financial matters as well as make sense of what their elected officials tell them about our collective money matters.

 

The first economic book I recommend is “Applied Economics” by Thomas Sowell.  Sowell grew up in Harlem and dropped out of high school, but after serving in the Marine Corps during the Korean war, he studied at Harvard.  His subsequent life of scholarship led him to the Hoover Institute at Stanford University.  “Applied Economics” walks through the basic economic principles that infuse the key issues of today, from immigration to taxes to health care.


“A Good Read: Hazlitt’s Economics In One Lesson” – March 28, 2005

Henry Hazlitt wrote “Economics In One Lesson” back in 1946 because he observed “economic fallacies that are at last so prevalent that they have almost become a new orthodoxy.”  His concern was that economic policies all over the world were “influenced if not wholly determined by acceptance of some of these fallacies.”  In very readable, entertaining, accessible prose, Hazlitt explains his main point: “The art of economics consists in looking not merely at the immediate but at the longer term effect of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” He then walks through several common policies based on economic fallacies: public works projects, tariffs, minimum wage, rent control.  He writes in a common sense tone, and instead of relying on statistics or formulas, uses straightforward language and examples that make it clear to understand the fallacies, analyze the policies and reach solid conclusions about how to examine any economic policy.  I especially recommend this book to high school and college economic students who may be overwhelmed by charts and graphs.  This book makes the most important lessons of an economic education accessible and applicable to your life.


“A Good Read: Friedman’s Capitalism and Freedom” – April 4, 2005

Nearly half a century ago, Professor Milton Friedman delivered a series of lectures at Wabash College.  Professor Friedman, with the help of his wife, compiled these lectures into a book called “Capitalism and Freedom.”  Friedman won the Nobel Prize in Economics and this work will help anyone see why. In it, he articulates his philosophy with reasoned judgement explained in clear language and everyday examples that a reader can easily grasp. In the preface of the 1982 edition, Friedman explained that this work is a precursor to his and his wife’s 1980 book “Free to Choose,” which also had a PBS companion series. In “Capitalism and Freedom,” Friedman seeks to address this question, “How can we benefit from the promise of government while avoiding the threat to freedom?”

 

Some may wonder why they should read a book conceived 50 years ago about the link between politics and economics.  The short answer is that is still completely relevant to the public discussions of today. Consider this passage: “If one were to seek deliberately to devise a system of recruiting and paying teachers calculated to repel the imaginative and daring and self-confident and to attract the dull and mediocre and uninspiring, he could hardly do better than imitate the system of requiring teaching certificates and enforcing standard salary structures that has developed in the larger city and state-wide systems. It is perhaps surprising that the level of ability in elementary and second school teaching is as high as it is under these circumstances. The alternative system would resolve these problems and permit competition to be effective in rewarding merit and attracting ability to teaching.”


“A Good Read: de Soto’s The Mystery of Capital” – April 11, 2005

This week I recommend Hernando de Soto's "The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else."  I have quoted from it previously but encourage you to read the entire book.  De Soto demonstrates how an established legal system (i.e., the rule of law) that recognizes, systematizes, and protects property rights—thereby making them widely transferable and fungible-- is indispensable for capitalism to work efficiently.  He notes that only about 25 of the world's countries have a legal system that allows the majority of the citizens to have real property rights. In Africa, Latin America, and the former Soviet states, only a minority of people have true property rights.  The real-life implication of that abstract concept is this: if you own a house but have no deed, you cannot create working capital by obtaining a mortgage, or it you own a business but there is no legal corporate structure, you cannot sell shared or issues bonds to create useful capital.   De Soto brings our attention to many aspects of the U.S.’s political and economic structure that we take for granted.  We must keep his points in mind as we help the oppressed around the world build free societies and economies.

De Soto is the president of the Institute for Liberty and Democracy, a think tank in Lima, Peru.  He assists many countries in improving their legal systems to establish and protect property rights, earning former President Bush declaration of his work as “a great contribution to ending economic stagnation.”


“Another Forecaster on California’s Economy” – April 25, 2005

When the press talks about the economy, they mostly like to quote the Anderson School at UCLA, which has been upheld as an unbiased source.  I no longer have confidence this is true.  For balance, and because I believe that competition is healthy, I have started looking at the University of the Pacific’s Eberhardt School of Business releases on the economy.  The Business Forecasting Center at the Uof P is only about a year old, but its product has already caught my eye because the work tends to include detailed local and regional perspectives on California that I have not seen covered in other reports.  The style is clear and not clouded by academic gobblygook.  I commend Professor Sean Smith for his work communicating economic information to the public.

 

Beyond the California summary, the areas covered are: Fresno, Merced, Modesto, Oakland, Sacramento, San Francsico, San Jose, Santa Rosa, Stockton-Lodi, Vallejo-Fairfield-Napa, and Yolo.

 

To read the latest March 2005 report, it can be found at http://forecast.pacific.edu.


“A Good Read: Hayek’s The Road to Serfdom” – April 25, 2005

This week’s recommendation was written between 1940 and 1943 for a British audience by Nobel Prize winning economist F.A. Hayek. His goal was to warn about the dangers of the totalitarian government of the German Nazis and other socialist, fascist and communists states. Do not dismiss “The Road to Serfdom” as a 20th century anachronism because the messages are pertinent to this day.  Hayek explains why “planning” an economy not only fails to achieve its stated goals, but also damages the people it purports to help.  In a foreward written later, Hayek said that he thinks that many readers missed a main point of the book, which is, “that the most important change which extensive government control produces is a psychological change, an alteration in the character of people.”  He noted that such a change was slow and could take one or two generations. Since we are now a few generations out from modern socialism and the growth of the American state, it is worthwhile to remind ourselves about the principles of liberty, their application to politics and economics, and the need for us to be vigilant in the cause of liberty.


“A Good Read: Tobias’s The Only Investment Guide You’ll Ever Need” – May 2, 2005

Continuing the theme of recommending some common sense books about economic issues today I suggest you take a look at the writings of Andrew Tobias.  His most famous work is “The Only Investment Guide You'll Ever Need.” He wrote it because he was tired of repeating the same advice when everyone asked him for investment advice. He originally wrote this in the 1970s, but has updated it several times since.  His practical, straightforward advice is as accurate today as ever and will set anyone on the right path of handling investments.


“A Good Read: Malkiel’s A Random Walk Down Wall Street” – May 9, 2005

“A Random Walk Down Wall Street” by Burton G. Malkiel is  advertised as a staple on any business shelf, and I encourage you to make it a staple of your personal financial education.  Professor Malkiel teaches at Princeton, but his book is accessible even to all.  He outlines the basics of investing, not just in stocks and bonds, but also in real estate or even collectibles.   This book will help you organize your own financial future and raise issues that may not even be on your radar screen.


“A Good Read: Heilbroner’s The Worldly Philosophers” – May 16, 2005

For the last several weeks I have been suggesting to you some of the world’s best books about economics.  Today I recommend a book about those economists.  “The Worldly Philosophers” by Robert Heilbroner reviews the lives, times and thoughts of some of the greatest economic thinkers.  His biographies bring these great thinkers to life and help us see how their thinking was shaped by their upbringing and surroundings.  Heilbroner draws important insights from these stories, and his concluding thought about Karl Marx is among the best: “The answer to Marx lies not so much in pointing out the injustices of communism as in demonstrating that capitalism can continue to evolve and to adapt its institutions to the never-satisfied demands of social justice.”


“Students for Saving Social Security” – June 20, 2005

As President Bush continues to plug away at much-needed Social Security reform, he is getting support from the very generation that stands to lose the most from the current system and gain the most from personal accounts.  Students for Saving Social Security is a nonpartisan, grassroots campaign on college campuses around the nation. Some of these young people are experts on Social Security, some are not.   But even those who are not are experts in what they know they need: personal accounts and no tax hikes.  Check out their site and the blog that helps you understand the minds of our next generation of leaders: http://secureourfuture.org/.


“Social Security Fact of the Day” – June 20, 2005

For more on the Social Security debate, inform yourself with a Fact of the Day from Americans for Tax Reform.  Every day the website www.atr.org offers a tid-bit to help inform the discussion.  Recent facts—each backed up with citations and easy-to-understand charts—include these: the number of Americans over age 65 will grow from about 35 million now to 86 million when today’s young workers retire; and the impact of lifting the wage cap would be a severe hit to stay-at-home-mothers.


“Retirement’s Reckoning” – June 27, 2005

The Reason Foundation has a new report, “The Gathering Pension Story,” that bears pondering (see the summary at http://www.rppi.org/ps335polsum.pdf ).  Most Californians are aware of San Diego’s $2 billion pension deficit.  Tack onto that our state’s teachers’ retirement system has a shortfall of around $24 billion.  Many other places are experiencing the same.  According to Reason, the State of Illinois faces a $35 billion pension deficit.  West Virginia's is $3.5 billion along with $3.3 billion in workers’ compensation liabilities -- these together are nearly triple that state’s annual budget.  According to the report, private pension plans in America are short between $400-$500 billion.  This should give folks a better measure of how sound the structure of the defined benefit system is.  Government pension shortfalls would likely be on par with the private defined benefit plans if governments were not able to constantly throw additional money into their funds.

 

Clearly, public defined-benefit programs have the intrinsic flaw in that no one is accountable for either the performance of these funds, nor the promises made to future retirees.  Legislators can pile on benefits knowing that they will likely be out of office by the time the public catches on.   A much better way to fund public sector retirements is to do what the private sector is doing more often: have new workers participate in a defined contribution model.  From a policy standpoint, the advantage of a defined contribution system, where the government could match employee contributions to a 401k plan, is that it provides the most stability for budgeting since the contribution levels are known.  Under defined pension plans, if a plan is mismanaged or unsustainable promises are made, we see the incredible volatility in what the public is asked to pay.  Plus, under defined benefit plans, individuals would no longer have to worry whether those who are managing their money are using funds fight partisan battles against corporations that have nothing to do with the secure retirement of their customers.


“A Good Read” – July 11, 2005

Today I recommend a series of essays by Frederic Bastiat. You can find them in many forms, but the collection I have is titled “Selected Essays on Political Economy” by Frederic Bastiat and is published by the Foundation for Economic Freedom.  Bastiat wrote in France in the 1840s, but the English translation is applicable to the political debates of our day. Consider the beginning of his essay “The Law.”  He warns of the problems that arise from “the disastrous principle … that, under the pretext of organization, regulation, protection, or encouragement, the law can take from some to give to others…”  A page later he praises the United States, saying “There is no country in the world where the law confines itself more rigorously to its proper role, which is to guarantee everyone’s liberty and property.  Accordingly, there is no country in which the social order seems to rest on a more stable foundation.”  Bastiat would be horrified today to see how far the U.S. has devolved from that principle.  Indeed, we now exemplify the legal “plunder” he condemns.  Whenever we are faced with a plea for such government-backed plunder, we should apply the thinking Bastiat sets forth in his essay “What is Seen and What is Not Seen.” He uses the example of a broken window and how the money spent to repair the window stimulates other segments of a town’s economy.  But he notes, “The window having been broken, the glass industry gets six francs’ worth of encouragement; that is what is seen.  If the window had not been broken, the shoe industry (or some other) would have received six francs’ worthy of encouragement; that is what is not seen.”  We, in 21st century America, would do well to ask ourselves this question from 19th century France: what is not seen as a result of the legal plunder we perpetrate over and over again?


“A Good Read: Siegel’s The Future for Investors” – August 22, 2005

Wharton professor Jeremy Siegel offers a lot of food for thought in his latest book, “The Future for Investors.” Siegel did a tremendous amount of research on the companies of the S&P 500. You can look up what $1,000 invested in any of the original companies would have yielded over time, and the results are surprising. He also offers research comparing U.S securities to global markets, which shows how being a contrarian investor can pay off big.  But what I most enjoyed about the book was Siegel's insights into history and how unique a time we are living in now.   He offers numerous examples of how technological innovations have been lost and rediscovered time and time again due to inadequate means of communicating knowledge.  For example, during the Middle Ages, Europeans had worse lighting technology than the Romans did 1,000 years previously.  Siegel believe the Internet will not only prevent us from losing knowledge, but it will also bring about innovation at a faster pace than ever.  He points to a recent discovery by a man in China of a formula for determining if any number is a prime number.  This is a huge mathematical breakthrough.  The man's only tool was the search engine Google, which allowed him to read all the research that had been done previously on this conundrum.  

 

In the next part of the book, Siegel explores the Baby Boomer retirement and what it means for investors.  His hypothesis is that the impending retirement of the Baby Boom generation could bring about a severe depression in stock prices and thus the delayed retirement of our children’s generation until they are well into their 70s. The problem that he sees is too many sellers of stocks and other securities, and not enough buyers when Baby Boomers cash out in order to live in retirement.  Siegel believes the solution will be a new relationship between our country and the developing world in which the new investor class from these fast growing countries buys our assets in return for the goods and services we need for retirement. Sound scary?  Siegel thinks not because he believes that in a global economy, where the assets are held will be insignificant.


“Pension Problems” – August 29, 2005

The state of California and many of its counties and cities are experiencing pension crises.  Our state’s teacher retirement fund has a $24 billion unfunded liability and Los Angeles County’s unfunded obligation is at $5 billion. Pension obligations are a growing portion of government budgets and that means that other government services are suffering. It also means that governments have to consider other means of funding pensions, and many (including the state) are turning to pension obligation bonds. California is actually litigating to ratify $525 million in pension obligation bonds that were approved as part of the Governor’s financial emergency package.  This form of financing is not a guarantee of long-term savings and carries with it a set of risks that may outweigh the benefits.  To explore this subject and keep up on the latest pension news, I encourage you to visit www.pensiontsunami.com.


“No Fooling Mother Economics” – September 12, 2005
Katrina offers many teachable moments.  One of these has to do with the basic principle of supply and demand.  For this, I heartily recommend an article by Rand Simberg published last week at the Tech Central Station site: http://www2.techcentralstation.com/1051/defensewrapper.jsp?PID=1051-350&CID=1051-0902055

 

Amid calls to have government cap prices or use force against those who raise their prices, we need to turn to basic Economics 101.  Simberg does this beautifully: “It's really simple. In any locality, when the supply of a particular item is reduced with no change in demand, or the demand for it increased with no change in supply, or supply is decreased with a demand increase, prices will go up.”  When this happens, it is a signal to the market.  To those who want the product, they need to rethink how badly the product is wanted.  To the suppliers, it is a signal that more supply needs to be brought to the market.  Government intervention can only upset these signals thereby causing worse problems than high prices.

 

“A Good Read: O’Rourke’s Eat the Rich: A Treatise on Economics” – December 12, 2005

If you enjoy learning and laughing at the same time, then pick up a copy of “Eat the Rich: A Treatise on Economics” by P.J. O’Rourke. Rouke takes an entertaining romp through economics to answer the question: why are some parts of the world rich and others poor?  He begins by touring the New York Stock Exchange and showing us how American capitalism works.  Then he is off to Albania, to show, in his words an example of “bad capitalism.”  Then he does the same contrast with socialism, walking us through its realities in Sweden and Cuba.  He then revisits Econ 101, distilling all the professorial charts and graphs into ten simple points: 1. The market is never wrong; 2. So you Die; Things Still Cost What They Cost; 3. You Can’t Get Something for Nothing; 4.You Can’t Have Everything; 5.Break It and You Bought It; 6. Good Is Not as Good as Better; 7. The Past is Past; 8. Build It and They Will Come; 9. Everybody Gets Paid; 10. Everybody’s an Expert.  It is tongue-in-cheek, but his explanations make sense.  And his conclusions are right on: the free market, will all of its flaws, works best.  Its ability to do so is tied to law, the legal protection of economic liberty.  He thus boils down the elements of wealth, the reason why some places are poor and some are rich to this: hard work, education, responsibility, property rights, rule of law and democratic government.

 

“Minimum Wage Hikes Hurt the Poor” – January 9, 2006

In the wake of Governor Schwarzenegger’s announcement that he will seek a minimum wage rate hike policymakers should consider the Golden Gate Restaurant Association’s findings: 98% of restaurants raised their prices, 89% significantly, 54% reduced the number of employees, and 91% reported lower profits after San Francisco city raised the minimum wage.  That seems to accurately reflect the findings by a professor in another city.  A study of the minimum wage hike in Santa Fe, New Mexico, found that it led to an increase in unemployment of 3.3%. The shocking statistic though was this: the likelihood of unemployment increased 8.3% for less-educated employees.  Dr. Yelowitz concluded that the minimum wage hike “consequences were particularly harmful to less skilled adult workers - precisely the group for whom the ordinance is intended to help.”

 

My friend Stephen Frank has also drawn together a lot of information showing the ill effects of raising the minimum wage. Frank writes, “The lessons learned from the 40's, 50's, '60's, through the '90's was still true in 2005. If you want to harm those most in need, raise the minimum wage.” To sum up a few of the documented effects of raising the minimum wage:

1. Unemployment rises among the poor, even when the economy is good for others.
2. Those on welfare are 44% less able to get off welfare
3. Businesses employ more technology to replace workers.

Frank makes a great case that the minimum wage is a regressive tax and policy against the poor, minorities, and generally those trying to get a firm footing on the economic ladder. He cites numerous cases when even those on the left have admitted the destructive nature of having, let alone raising, the minimum wage. He also found that only about 6% of those making minimum wage are the sole supporter of their families. Read the whole thing at Frank’s blogsite:
http://capoliticalnews.com/discuss.php?id=258

 

“First Dumb, Now Dumber” – January 17, 2006

In October I related how CNBC smacked the economists at UCLA's Anderson School for their totally wrong prognostications on the housing market. CNBC put a graphic up showing that every year since 2002 -- when the median price for a house was $200,000 less than it is now -- the Anderson School has been saying that houses are overvalued in California. Today's Contra Costa Times has a piece by George Avalos, “Economist Warns of Housing Slump.” Take a wild guess where this economist works.

 

The Times paraphrases Christopher Thornberg of the Anderson School saying that California home prices are about 30 to 40 percent overvalued now, but a decline --"if that comes about" -- would occur over the better part of a decade, not suddenly. There is so much wrong with this statement. On the one hand, the economist is saying that houses are at least 30 percent overvalued-- but on the other, it is going to take a decade for buyers to clue in. So if your modest house is worth $300K now, Thornberg predicts it will likely be worth $200K, or less, in 2016. If I were still in the Assembly, I would offer a resolution directing the president of UC to begin  mandatory drug testing for the economists at the Anderson School.

 

Comments about the above article:

Dr. Sean Snaith, Director of the Business Forecasting Center at UoP's Eberhardt School of Business http://forecast.pacific.edu/index.html  has sent me his thoughts on the housing market:

 

“I have been advocating against a bubble for 8 months now and have proposed an alternative metaphor: The Housing Souffle.  The housing market, like a souffle, has been the combination of all the right ingredients blended together in just the right environment that has allowed for the souffle to rise.  A bubble by definition must burst, a souffle on the other hand does not.  It is a delicate pastry and it *can* go flat if the ingredients are not correct or the environment is not conducive.  The housing market is fundamentals driven and it will take a reversal in fundamentals to cause it to recede.  Other countries besides the U.S. have had housing ‘bubbles’ in recent history (the U.K. is one) and they are seeing a flattening out, not a ‘pop’ in the housing market.  I expect the same in the US as the souffle comes out of the oven in 2005 and cools a bit in 2006.”

 

“Points for Productivity” – January 23, 2006

I am as guilty as other politicians, bloggers and media for following and reporting economic data. I thus enjoyed the recent piece by Arnold Kling that begins by saying that daily tracking of economic data is “bizarre” and that “there is no rational reason to try to assess the economy more frequently than every six months.” Kling’s favorite statistic is the average annual growth rate of productivity over five-periods. Such a long view evens out quarterly fluctuations and removes the temptation to give political credit for what is the economy’s natural workings. Here is what it shows:

Period -- Average Productivity Growth

1955-1960 -- 2.03

1960-1965 -- 2.79

1965-1970 -- 2.09

1970-1975 -- 2.31

1975-1980 -- 1.55

1980-1985 -- 1.38

1985-1990 -- 1.65

1990-1995 -- 1.59

1995-2000 -- 2.28

2000-2005 -- 3.39

Kling concludes, while denying the accrual of political points to any president or policy, that “the economy today is in great shape. The average productivity growth rate in the last five years is the highest over the past half century.” To read the entire essay, visit
http://www.tcsdaily.com/article.aspx?id=122805C

I still think that policies have consequences, but I do agree that the consequences rarely show up in the short run.

“Underground Economy” – March 6, 2006

The Foundation for Fair Contracting and I co-sponsor an annual seminar on the underground economy.  This year’s event was last Thursday, and it was as hot a topic as ever. My goal this year was to make the point that we must focus our efforts.  Economists have cited numbers as large as $1.5 billion annually in uncollected sales and use taxes, and, while that is a large number my point that in a state of over 37 million people, that is less than $40 per person on the average.  This is far too low a number for massive audits and intrusive searches.  We have to identify those who are actively cheating on their tax obligations and audit them rather than every family who holds a garage sale or shops via a catalog.  From a study in Canada it was concluded that the biggest contributors to the underground economy are illegal drug dealing, prostitution, and other criminal activity. Certainly this is a focus where all government agencies can work together to enforce the law.

 

“Time to Shop” – May 1, 2006

The left is urging people to boycott work, school, and stores today, May 1st, to show their support for the “right” to enter the U.S. illegally.  The idea is to punish the economy and pull students out of public school to protest the American government enforcing its laws.  This is the same bizarre logic that tax protesters use when they refuse to pay their taxes. 

 

The great San Francisco Chronicle columnist Debra Saunders has suggested that to counter the protest we all go to work or school, and, in particular, we all go shopping today.  I will go even one better.  After you shop, find an owner-operated Mexican restaurant run by a hard working entrepreneur and give him, or her, your business.

 

“The Cost of Taxing Consumption Only” – May 22, 2006

Libertarian and conservative economists have long complained that it is wrong-headed and even immoral to tax income.   The argument is that it makes little sense to tax capital that could be better deployed by individual spending, savings and investment.  This is how the economy grows in the most efficient and productive way.  Thus, by this theory, the way to maximize tax revenue while having the least deleterious effect on the economy is to stop taxing income and only tax purchases, or, consumption. 
 
The cost of eliminating the state's personal and corporate income taxes in a revenue-neutral manner is not cheap.  By my math, for the last seven years, it would have taken an SUT rate of 18.2% to have brought in enough revenue to compensate for no income tax.  It is possible that the rate could be less, given a dynamic assessment of revenue yield from a better performing economy. 
 
Under a consumption-only tax system, those with modest incomes would pay more for consumer staple items, but those who buy expensive things would pay far more.  While 18.2% is a high number, whether or not one pays more or less tax would largely be a matter of choice because most consumer items are not necessities, consumers can choose to buy them or not.  One cannot choose whether or not to pay income tax.  Remember also, there would be positive effects on the economy from a more efficient way of treating capital.  While this is a very difficult political decision, if it were ever be done, it would be likely to spur income growth and make consumer goods more affordable.

 

“A Good Read: McCloskey’s If You’re So Smart: The Narrative of Economic Expertise” – May 30, 2006

When people ask me how to effectively lobby in Sacramento, I often tell them that they need a good story.  I have often seen committee hearings turn not on fact or logic, but on a well-spun, emotionally evocative tale.  It is human nature to be moved by such stories; we have been trained from the fairytales we were told in childhood to expect a beginning, a middle and an end, and then be able to infer the “moral of the story.”  Donald N. McCloskey’s book “If You’re So Smart: The Narrative of Economic Expertise” warns us about the stories economists tell.  McCloskey reminds us that not everything in human affairs has a neat ending like our fairytales and novels.  He cautions that most storytelling formats are too limiting for the complexity of economics. For example, he looks at Britain’s reaction to German’s growing industrial performance in the 1880s.  (If that seems too remote for you, consider today’s coverage of the U.S. vis a vis China’s rising economic power.) He quotes an economist who wrote, “…Germany’s gains still left her far behind Britain as a commercial power…”  McCloskey says this economist was not thinking critically: “The metaphors of disease, defeat, and decline are too harshly fixated on Number One to be right for an economic tale.  The Lombardi motto governs narrowly defined games well enough. Only one team wins the Super Bowl. The fixation on Number One, though, forgets that in economic affairs, being Number Two, or even Number Twelve, is very good indeed.” McCloskey demonstrates how “the way of telling stories, then, shapes one’s opinion…”  Most refreshing about McCloskey’s explanation are his references to God.  His spiritual outlook agrees with my belief that reducing human behavior to a formula and then seeking to predict future behavior based on that formula ignores the divine complexity with which we have been endowed.  McCloskey does not expect economists (nor historians or politicians for that matter) to stop telling stories, but “what we need from our experts is less pretended omniscience and more real wisdom, wisdom to tell stories testing metaphors and to frame the metaphors that test the stories.”

 

“A Good Read: Ormerod’s Why Most Things Fail: Evolution, Extinction and Economics” – June 5, 2006

“Why Most Things Fail:  Evolution, Extinction and Economics” by Paul Ormerod addresses “what is probably the most fundamental feature of both biological and human social and economic systems: failure. Species fail and become extinct, brands fail, companies fail, public policies fail.”  Ormerod is concerned primarily with business failures, but he looks to biology for comparisons and patterns. He provides a brief history of capitalism and addresses a number of assumptions about the behavior and awareness of individuals, firms, species, etc.  He finds the same failure rates in mindful human ventures as in natural occurrences.  From this he concludes that the complexity, and thus apparent randomness, of the environment is significantly greater than generally believed.  Or put another way, the world is far too complex to control and unintended consequences of any action are endemic.  Indeed, this is why the so-called “planned economies” failed so spectacularly.  Humans who are aware of such failure possibilities and the unintended consequences compensate by endless innovation.  Innovation is what allows firms to find new ways to meet their customers’ needs, even when they cannot precisely determine why a previous product or strategy did not meet that need.  Ormerod also concludes that even nominal increases in the overall useful knowledge by individuals and firms can make the overall society much more robust. 

 

“Let the Economy Do Its Own Work” – July 17, 2006

Hat tip to Forbes blogger Rich Karlgaard for directing me to a great column by Tim Worstall about the rise of productivity in America and how it is affecting the economy.  See this link:


http://www.tcsdaily.com/article.aspx?id=071306A

 
Explaining what is going on is a conundrum. Productivity is surging, real Gross Domestic Product is growing at the same rate, and profits are historically high -- as are the incomes of the top 1%, but wages for the rest are stagnant. Why?

Worstall's answer is that GDP growth has to be higher than productivity growth for wages to rise. It is simple to see why. If a company can meet growing demand by becoming more efficient, rather than having more employees, there is no good reason to hire more people. Since this means less demand for labor, wages will not rise, except for those who are best positioned to benefit from higher profits, which is what higher productivity is yielding right now.

 

The question is what to do about it. We could slow productivity through higher regulation by beefing up OSHA, the EPA and the like. We could also increase demand by having the government increase deficit spending. But we know that Keynesian solutions of this kind are counter productive. Productivity is the center of wealth creation. It is not something that should be artificially kept in check. So what to do?  I agree with Worstall: we should do nothing. Eventually, GDP growth will be higher than productivity. Employment growth and wages will rise naturally.

Karlgaard's analysis of the political angle is right on: “...some Democrats want to bet the 2006 election on the minimum wage. That's a noble thought, and it might even be smart politics. But as Worstall points out, it's lousy economics. If Dems want to grow wages, they must tell voters how they'll grow the GDP faster than productivity. Er, tax cuts anyone?”

 

“A Good Read: Harford’s The Undercover Economist” – August 14, 2006

The “Dear Economist” column by Tim Harford in the Financial Times Magazine is always a good read.  Now Harford has produced “The Undercover Economist” a rough equivalent to an Economics 101 course that is part field guide to economic thought and part expose of the economic principles behind common events.  He covers an array of economic concepts, including scarce resources, market power, price gouging, market failure, inside information and game theory. Then he uses those concepts to explain things we encounter every day:  coffee prices, airline seating, supermarket displays, health care costs, the gap between rich and poor nations and (my personal favorite as a Board of Equalization Member)  the substantial hidden costs of taxation and regulation.  As a bonus, “The Undercover Economist” is so entertaining that you will wonder how the “dismal science” got its name.

 

“A Good Read: D. Friedman’s Hidden Order: The Economics of Everyday Life” – October 23, 2006

As this fall’s election approaches, it is fun to take a look at a book that seeks to explain how people make choices.  “Hidden Order: The Economics of Everyday Life” by David D. Friedman posits that economics is not about money but about reason.  Friedman writes, “Economics is that way of understanding behavior that starts from the assumption that individuals have objectives and tend to choose the correct way to achieve them.”  Although he writes about economics and comes from an economic family (he is the son of Milton Friedman), David is not an economist by training. That actually makes his book more readable because he fills it will real-life examples rather than abstract formulas or the charts-and-graphs that so many of us associate with economics. For example, he explains his personal approach to street crime when he lived in New York City: “When I found it necessary to go out at night, I carried with me a four-foot walking stick.  My friend Ernest Van den Haag argued that I was making a dangerous mistake; potential muggers would see my behavior as a challenge and swarm all over me.  I responded that muggers, like other rational businessmen, would prefer to obtain their income at the lowest possible cost. By carrying a stick, I was not only raising the cost I could inflict on them if I chose to resist, I was also announcing my intention of resisting.  They would rationally choose easier prey.”  Friedman applies this common sense economic decision making to subjects from traffic, babies and illegal drug use.  You will find his book enjoyable, practical and eye-opening.

 

“A Good Read: M. Friedman’s Capitalism and Freedom” – November 20, 2006

The world and freedom lovers in it lost a great hero this week with the passing of Nobel Prize winning economist Milton Friedman.  In writing about the tremendous impacts of this man, the Wall Street Journal wrote, “There are some public figures whose obituaries can be written years in advance. Milton Friedman was not one of them,” and printed an article he had just written nearby.  Indeed, his name came up while I thinking about and writing the above two stories in this newsletter.  Today, then, I am reprinting my last recommendation of one of his books.  The questions Friedman raises in this work are tributes to the genius of this thinking and will continue to influence the world as long as people read his incredible body of work.

 

Nearly half a century ago, Professor Milton Friedman delivered a series of lectures at Wabash College.  Professor Friedman, with the help of his wife, compiled these lectures into a book called “Capitalism and Freedom.”  Friedman won the Nobel Prize in Economics and this work will help anyone see why. In it, he articulates his philosophy with reasoned judgment explained in clear language and everyday examples that a reader can easily grasp. In the preface of the 1982 edition, Friedman explained that this work is a precursor to his and his wife’s 1980 book “Free to Choose,” which also had a PBS companion series. In “Capitalism and Freedom,” Friedman seeks to address this question, “How can we benefit from the promise of government while avoiding the threat to freedom?”

 

Some may wonder why they should read a book conceived 50 years ago about the link between politics and economics.  The short answer is that is still completely relevant to the public discussions of today. Consider this passage: “If one were to seek deliberately to devise a system of recruiting and paying teachers calculated to repel the imaginative and daring and self-confident and to attract the dull and mediocre and uninspiring, he could hardly do better than imitate the system of requiring teaching certificates and enforcing standard salary structures that has developed in the larger city and state-wide systems. It is perhaps surprising that the level of ability in elementary and second school teaching is as high as it is under these circumstances. The alternative system would resolve these problems and permit competition to be effective in rewarding merit and attracting ability to teaching.”

 

“Collections Show Accelerating Economy” – December 21, 2006

According to the Franchise Tax Board's February collection reports prepared for the Department of Finance, January net withholdings for personal income tax are up sharply -- almost $2 billion over January 2005 ($7.6 billion vs. $5.9 billion).  The previous gain - comparing January '04 to January '05 - was about $800 million.  

 

Although corporate withholdings for January are slightly down compared to January 2005, the total net collected for the combined personal income tax and corporate tax for January 2006 is up over $1.5 billion from last January.   For the fiscal year that began in July, the state's personal income tax collections are up over $3 billion from this date last year.  Corporate tax collections are coming in about $600 million above this date in the 2005 fiscal year.

 

Given that the unexpected money is to a large degree from individual taxpayers it should be treated with caution.  This is a sign of one-time money.  That is, this easily could be the taxes of a small number of individuals who choose to sell lots of stock recently but will not be able to do so again.  This money should NOT be dedicated to on-going expenditures as that will spell fiscal disaster in the near future.

 

“My Nomination for Column of the Year” – December 27, 2006

LL Readers know I try to do a lot of reading. Even so, it is a rare occurrence that I read something in a newspaper that is truly exceptional.  Last week, Dan Weintraub of the Sacramento Bee penned a piece for his California Insider weblog column that I am still thinking about, and I have concluded it deserves special recognition. Dan is known as a chronicler of political baseball in Sacramento. This column is only about politics on the surface; at its core it is a wonderful lesson about economics that would impress Milton Friedman. Those of you who are economics or social studies teachers might consider spending time dissecting this column with your students. What Weintraub does in a few hundred words is more memorable than the hundreds of pages of what I recall wading through for college economics.

 

His basic thesis is that we need to look for an alternative to employer-managed health care. To illustrate his point, he talks about what life would be like if government mandated that employers sign us up for plans to manage our nutritional needs, or our housing, instead of letting us deal with these decisions and costs on our own as we do now. The result would most certainly be bad food and substandard housing - and probably shortages of both. Why then are we so wedded to the notion that health care consumers need something between them and the providers of the health care? It is exactly the right question to ask -- let the light shine on this column:

http://www.sacbee.com/content/politics/columns/weintraub/v-print/story/14214335p-15040397c.html

 

“A Better Way to Fight Poverty – Economic Growth” – January 2, 2007

To many on the left, the social compact requires government to play the role of Robin Hood. Over the last 40 years this policy, while well-meaning, has not proven effective except to sort-of soothe the conscience of America.  But I say it is not moral to see poor people and think, “All we can do is keep paying taxes.”  Those of us on the right have long-argued the only effective way to lift people out of poverty is to make the economic pie larger and create more opportunities.  There will always be some very needy people that will need government help – it is a utopian fantasy to believe otherwise.  But it is a national disgrace how much multi-generational poverty there is in America. It should not be as bad as it is and something needs to be done about it.  

 

A couple weeks ago the Goldwater Institute released a study that looked at Census Data dealing with poverty and looked for a connection with tax rates.  What they found is illuminating, but not surprising.  

 

The report, “How to Win the War on Poverty: An Analysis of State Poverty Trends,” grades each state on its progress in reducing poverty. From 1990-2000, the national poverty rate fell by 5.3 percent to 12.4, and the childhood poverty rate fell by 9.4 percent to 15.4 percent. There are however, large variations between states. Some states reduced poverty more than 20 percent; others increased the level of poverty by more than 25 percent. The 10 states with the lowest tax burdens saw poverty decline 13.7 percent, more than twice the national average. The 10 states with the highest tax burdens had an average 3 percent rise in poverty.  For instance, the report compared California with Arizona.  In 1990, Arizona had the fifth-highest tax burden in the nation and almost 16 percent of Arizonans lived below the poverty line. California, on the other hand, had a lower tax burden and a poverty rate of 12.5 percent. During the 1990s, Arizona’s tax burden decreased and California’s increased. Arizona’s poverty levels fell to 13.9 percent, while California’s rose to 14.2.  You can read the full report here:

http://www.goldwaterinstitute.org/aboutus/ArticleView.aspx?id=1197

 

We should all give to charity, if we are able to do so.  But we need to get past the thinking that all we can do for poor Americans is give them stuff.  This strips away their humanity and turns people into objects of pity.  There is another way, if we are brave enough to look at the evidence.  I believe that God made people so that their humanity is realized by the exercise of free will.  People can transform their lives and the lives of their children – but only if they have the opportunity to choose to do so.  

 

I am reminded of a quote that is often falsely attributed to Abraham Lincoln, but was actually first said by William Boetcker, German-born Presbyterian clergyman who lived from 1873-1962. In 1916, he said:

“You cannot bring about prosperity by discouraging thrift.

You cannot help small men by tearing down big men.

You cannot strengthen the weak by weakening the strong.
You cannot lift the wage-earner by pulling down the wage-payer.
You cannot help the poor man by destroying the rich.
You cannot keep out of trouble by spending more than your income.
You cannot further the brotherhood of man by inciting class hatred.
You cannot establish security on borrowed money.
You cannot build character and courage by taking away men's initiative
and independence.
You cannot help men permanently by doing for them what they could
and should do for themselves.”

“A Good Read: Sowell’s Basic Economics: A Citizen’s Guide to the Economy” – February 26, 2007

If you have been fortunate enough to read any recent commentaries by Thomas Sowell, you will be eager to pick up my recommendation of his book “Basic Economics: A Citizens Guide to the Economy, Revised and Expanded.”  Sowell is a brilliant thinker and writer who has a gift for being able to take seemingly complex economic issues and distilling them to a completely understandable and practical essence.  This book walks through some basic economic principles that tend to be taught using charts and graphs and with confusing terminology.  Sowell avoids those pitfalls and explains what you need to know about, say, banking or prices.  He uses colorful examples, say of a trip to India and the difference between buying items in the bazaar versus using a government-run Indian bank, that put the abstract concept of economics into terms that make sense in our daily lives. 

 

“Underground Economy” – April 16, 2007

We all know people who are paid cash under the table, or who strike a deal with merchants to not pay sales tax, and we all suspect such transactions are multiplied many times over by the illegal immigration problem. Baron’s Magazine in 2005 estimated the U.S. “underground economy” to be $970 billion or nearly 9% that of the legitimate economy with a growth rate the same or greater than the above ground economy. Those numbers are staggering and may even be an underestimate. To help bring the underground economy above ground, I am hosting my sixth annual Underground Economy Conference with the Foundation for Fair Contracting on May 3, 2007 at the State Capitol in Sacramento, Room 4202 from 8:30 a.m. to 4:30 p.m.  Speakers include representatives from the Board of Equalization, the Employment Development Department, Franchise Tax Board, Department of Insurance, Contractors State License Board and the Division of Labor Standards Enforcement.  This conference is an opportunity for concerned parties to share information and resources across agencies and industries, as well as identify new trends and schemes by offenders.  If you are interested in attending this free conference, call my office at (916) 445-2181.

 

“Economic Perspective” – June 25, 2007

Every few months the BoE produces a document that is a summary of economic developments called “Economic Perspective”.   The latest edition has a list of the top ten service industries in California and what share these are of the nation’s payroll per industry.  This was compiled from U.S. Census Bureau data.  One way to look at this list is to remember California has 12 percent of the countries’ population, so industries that have more than a 12 percent national share indicate California has a greater share of that industry.  Some of these are no-brainers, but there are some surprises as well.  http://www.boe.ca.gov/news/pdf/ep-5-07.pdf

 

Top Ten California Service Industries as Percentages of U.S. Payrolls in 2004. 

 

#1 Motion picture and sound recording industries (excluding internet)        58%

#2 Internet service providers and Web search portals                                    48%

#3 Software publishers (excluding internet)                                                   30%

#4 Performing arts, spectator sports, and related industries                           29%

#5 Accounting, tax preparation, bookkeeping and payroll services               23%

#6 Lessors of nonfinancial intangible assets                                                   21%

#7 Internet publishing and broadcasting                                                        20%

#8 Scientific research and development services                                            19%

#9 Specialized design services                                                                        19%

#10 Nondepository credit information                                                           18%

 

“Bottom Ten Service Industries” – July 2, 2007

Every few months the BoE produces a document that is a summary of economic developments called “Economic Perspective”.   Last week I listed the top ten service industries in California and what share these are of the nation’s payroll per industry.  This week I list the bottom ten service industries in California.

 

This was compiled from U.S. Census Bureau data.  California has twelve percent of the countries’ population, so industries on this list that have less than twelve percent national share indicate the extent to which California lags the rest of the U.S. in that industry. 

http://www.boe.ca.gov/news/pdf/ep-5-07.pdf

 

Outpatient care centers and other ambulatory health care services                10%

Business, professional, labor, political, and similar organizations                  10%

Remediation and other waste management services                                      10%

Newspaper, periodical, book, and directory publishers (except Internet)       10%

Other information services                                                                              9%

Telecommunications resellers, satellite, and other telecommunications         9%

Nursing and residential care facilities                                                             8%

Psychiatric, substance abuse, and specialty hospitals                                     8%

Social assistance (except child day care services)                                           8%

Home health care services                                                                               7%

 

“Intangible Riches” – September 4, 2007

There is a marvelous article in the August/September issue of Reason magazine.  Those who have been reading my letter for a long time will catch the wisdom of Julian Simon (The Ultimate Resource) and John Kurzweil (The Singularity is Near) in this article.
 
Reason’s Ronald Bailey sat down with World Bank economist Kirk Hamilton to talk about the World Bank’s study, “Where is the Wealth of Nations?”, which deals with wealth in the modern world and what lessons we should draw for helping the poorest nations get out of poverty.  The study can be downloaded at the World Bank site here:
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/ENVIRONMENT/EXTEEI/0,,contentMDK:20872280~pagePK:210058~piPK:210062~theSitePK:408050,00.html
 
This study represents a major change in thinking for the World Bank.  In the past it was thought that injecting huge blocks of capital in large industrial projects was the best way to get poor countries on the road to prosperity.  However, by the Bank’s reckoning, these projects have failed more than half the time. 
 
Hamilton’s research shows that it is far better to focus on establishing respect for the rule of law and education than on providing material things.  Focusing on the social institutions has the practical effect of attracting capital naturally.   Simply providing this capital without the associated social support makes capital wither and go the other direction.
 
What I find fascinating is the discussion in the study about wealth.  The World Bank study divides capital into three kinds:  Natural capital (natural resources), produced capital (machinery, equipment), and intangible capital (human labor, knowledge, skills).  Divided this way, the study finds that natural capital accounts for only 5% of the world’s wealth, produced capital only 18%, leaving 77 % of the world’s wealth as intangible capital.  How does he describe this?  Hamilton says, “Intangible capital is capital that has an economic value but is not something you can drop on your foot.”  In other words, what really makes a country wealthy is the brainpower of its citizens and the institutions that allow the brainpower to flourish.  He says, “It’s the skills, not the rocks and minerals.”
 
A practical example of this is Nigeria.  Given the abundance of natural resources like oil, one would assume Nigeria would have riches galore.  But the country has not provided legal stability and education, and is consequently not doing well at all.  Despite the resources, very low efficiency occurs throughout the rest of the economy --- so much that Hamilton rates Nigeria as presently having “negative intangible capital”.
 
The old thinking that human beings are burdensome and bad for the world is totally wrong.  Robert Malthus, meet Julian Simon.  People are the ultimate resource, provided they have the chance to live in societies that provide the structures of freedom.

 

“Ecologists vs. Economists” – September 24, 2007

Kudos to John Tierney for his positive look at Bjorn Lomborg’s market approach to solving global warming in Tierney’s New York Times blog.  This resulted in heaps of criticism from Times readers who are not generally in favor of Lomborg.  Lomborg co-founded Greenpeace but now believes the modern environmental movement needs to come down to earth with less emotion and more rigorous science.

 

One of the critics of Tierney’s column points out that the members of the Copenhagen Consensus (Lomborg’s group) are all trained economists rather than climate scientists. Tierney then makes a case that the predictive record of economists is probably better than that of climate scientists.

 

While I agree with Tierney, the irony is that a trained economist probably got us into this mess to begin with.  Follow the historical train in this article -- from Malthus, to Ehrlich, to Julian Simon, to Lomborg.  Just doing this you will know quite a lot about the ideological battles that really matter.

 

http://tierneylab.blogs.nytimes.com/2007/09/18/economists-v-ecologists/

 

“Financial Bubbles May Serve Larger Purpose – October 1, 2007”
There is a wonderful contrarian article at the Tech Central Station site. Daniel Gross is interviewed about his upcoming documentary for PBS about market bubbles. Gross is taking on the conventional wisdom that bubbles are all bad. He concedes that irrational behavior leads to bubbles and the market distortions end up hurting people when the bubble pops. But Gross makes the case that the popping, and the resulting mess, is only half the story. The other side is that without these unusual periods of intense enthusiasm, we would otherwise not lay the foundations that help the economy in the long term. In sum, the post-bubble environment offers excess capacity, lower prices, and conditions where new ideas can take root.

Here is an example. During the tech bubble of 2000 large companies made massive investments in fiber optic cables and switches and other essential infrastructure to make the Internet work. In the fervor of the times, these businesses seemed like pipelines to unending riches. After the crash, without the promised services of a new economy, the customers for the Internet infrastructure evaporated. Consolidation and bankruptcies soon followed. A couple years later, out of nowhere, Google came along and took advantage of this excess infrastructure to become one of the most successful companies ever, along with sparking a new online information, entertainment and advertising industry that in many ways is even better than we imagined it could be back in 1999.

Gross notes that when bubbles do pop it is the hardest time to see the upside. This is certainly true of the housing market. But even here, Gross already sees long term positives. First, the foreclosed houses are not going to be torn down. They are going to be used by someone at a lower price. Moreover, while many people got themselves into trouble through the refinance market, there are just as many people who did very well by exchanging different mortgage products for ones that saved them money – and doing this again and again. Gross says:

“…the idea that individuals watch interest rates and if they fall 50 basis points, 100 basis points, re-finance, that’s new. The mechanisms are now there to do that quickly, which did not exist in the ‘80s or even the early ‘90s. Going forward, that has to be a big economic positive.”

The next bubble? Gross sees signs that the conditions are forming for a bubble in alternative energy. Investors may want to be mindful of this possibility to avoid getting crushed if and when frothy exuberance evaporates. But if you believe Gross, the ultimate result of a bubble in alternative energy will be more, and cheaper, alternative energy.

http://www.tcsdaily.com/article.aspx?id=092507C

 

“A Good Read: Birdzell and Rosenberg’s How the West Grew Rich” – October 1, 2007

I recently read about a program to help find employment for college-educated people in Middle Eastern countries. After additional training, in things as simple to us as how to dress for work in an office, students are placed with companies that have agreed to participate. The goal of the program is to provide hope for a population that otherwise does not see much promise of an economic future. That concept reminded me of a good read: “How the West Grew Rich” by Nathan Rosenberg and L.E. Birdzell, Jr. The book tells the story of “the move from poverty to wealth” while noting that poverty in the West did not completely disappear, but was reduced from “90 percent of the population to 30 percent, 20 percent, or less, depending on the country and one’s definition of poverty—a concept that seems to keep growing in content with economic growth itself.” The authors then explain the gradual build-up of characteristics that made the west’s prosperity possible, going back to the middle ages when the social seeds that enable economic growth were planted. They then trace the decline of feudalism, the expansion of trade and the development of the legal, exchange and taxation systems that fostered private property. One of the most interesting chapters in the book is the discussion about the link between science and wealth by harnessing the innovations from chemistry and physics. The book was written at the end of the Cold War, so it is focused on applying its lessons to communist and Third World countries, but I found many of its lessons insightful when applied to the people of the Middle East and the challenges they face today.

 

“Losing the War Between the States” – December 17, 2007

 

“A record eight million Americans moved from one state to another last year. Where is everyone going, and why? The answer has little to do with climate: California has arguably the nicest climate of any state in the nation -- yet in this decade more Americans have left the Golden State than entered it,” wrote Arthur Laffer and Steven Moore in last week’s Wall Street Journal. Though none of us want more crowding and traffic, all of us should be very concerned about the causes for this out-migration because it bodes unwell for those who remain here.

 

Laffer and Moore were commenting on their recent ranking of all 50 states based on economic competitiveness.  They used 16 variables to rate the states—policies from taxes to right-to-work laws, education to government debt.  They have been doing this analysis for awhile now and have found that in the last decade, those states that are more competitive have less than half the population of those that are the least competitive. And California is dead last.  Why?  Attracting jobs and capital. They explain:  “States with the highest income tax rates -- California and New York, for example -- are significantly outperformed by the nine states with no income tax, such as Texas and Florida. As a study from the Atlanta Federal Reserve Board put it: ‘Relative marginal tax rates have a statistically significant negative relationship with relative state growth.’”

 

The cautionary tale is a look at some of the older, northeastern state where this trend has existed for some time.  States that remain uncompetitive for a long time “are plagued by falling housing values, a shrinking tax base, business out-migration, capital flight, high unemployment rates, and less money for schools, roads and aging infrastructure. These factors of decline hurt the poor the most.”  That is what California is becoming.  If our Governor and Legislators want to turn that around, they should resolve in 2008 to correct some of the most egregious policies that are driving the most productive Californians elsewhere.

 

To read more of the “Rich States, Poor States,” study, go to:

http://www.alec.org/

 

Government Warped Competition --- February 4, 2008

 

Technological advances in communication are announced almost daily.  Your television signal may come to you from a telephone company and your telephone dial tone may come from a cable television company.  Any content, communications, or data that can be transmitted digitally can be sent from a variety of different platforms. In recognition of all of this the Legislature created a digital communications law to level the playing field for these companies.  Over the decades these companies have been subject to big distinctions in government regulations, many of them unnecessary and certainly now with all of this competition a lot less necessary.

 

Taxation is the biggest government influence on business success and right now we are living in an intolerable situation where some of these companies have their property taxes set by the Board of Equalization and others have their property taxes set by 58 county assessors.  The BOE has done nothing to define a single method of assessing the property taxes on both telephone and cable companies.  It would be a great loss to Californians if one of these companies failed because its tax burden was greater than its competition.  Yet the BOE and the Assessors want to take another year to study the issue.  I know government is not designed to move quickly, but this is very risky.

 

We Are All Supply-Siders Now--- February 18, 2008

 

 

Last month a top staffer for a liberal Democrat Constitutional officer asked me for research that proves tax cuts spur economic growth.  There must be something in the air because none other than Speaker Nancy Pelosi (D-CA) gave a great supply-side statement a couple weeks ago in support of the stimulus package.  She said, “Economists estimate that each dollar of broad based tax cuts leads to $1.26 in economic growth.”  Wow!  Ignoring for a moment that the President’s stimulus package did not contain any tax cuts, I accept the Speaker’s statement with gratitude.

 

http://www.crosstabs.org/blogs/mdetlh/2008/jan/27/pelosi_a_supply_sider_yes_tax_cuts_do_pay_for_themselves

 

I was happy to oblige the request to provide research showing that tax cuts are great for the economy and that governments’ focus on the economy with a supply-side perspective is superior to the Keynesian “demand-side” strategy that relies on government spending to stimulate the economy.  There is a lot of material to pass along, especially dealing with Reagan’s tax cuts, but I chose an article by Alvin Rabushka of Stanford’s Hoover Institution that ran in the Wall Street Journal last summer.   I chose it specifically because it is not even about America.  It is about China being perhaps the greatest supply-side success story in history.  China’s 10% annual average growth for 19 years is a world economic record.  This growth is projected to make China the world’s largest economy by 2020.

 

http://www.hoover.org/publications/digest/3523046.html

 

It all began in 1978 when Deng Xiaoping started China on the road of reform.  He established coastal economic zones, increased foreign investment, liberalized trade and allowed some free markets to develop.  But Rabushka argues the most important ingredient of this incredible story is massive, sustained tax cutting.  In 1978 total government revenue consumed about 31% of GDP.   By 1995, China’s tax burden had fallen to less than 11 percent of GDP.  This is more than a 20% reduction of taxes as a share of GDP, the actual rate cuts are of the magnitude of 60%.  Deng’s policy of massive tax cuts shifted one-fifth of all resources away from government and into the country’s towns and villages where the money was used to support fledgling markets.   As the government allowed more of the fruits of economic activity to stay in the private sphere, more has been plowed back into the economy in the form of investment and private ownership. Now, the government sector comprises 34% of gross output, down from 82% in 1978.  I now understand Jim Rogers’ recent statement on CNBC that with respect to business regulation and taxation, “Massachusetts is more Communist than China.”

 

Moreover, Rabushka provides evidence showing that China’s growth accelerated most when taxes were cut the most.  In periods where tax rates stayed stagnant, growth was slower.  Finally, he shows that China’s government was not starved of funds as a result of these tax cuts, in fact the opposite is true.  And this is the essential lesson of all of this.  Still if you would like a domestic version of the same thing, look at the results of President Bush’s 2003 slashing of the capital gains rate.  Within three years, capital gains tax revenue more than doubled.

 

http://www.ncpa.org/pub/st/st307/st307.pdf

 

Speaking of Foreign Examples --- February 18, 2008

 

The Wall Street Journal offered another sterling example of a foreign country’s experience with taxes last week in a piece by Mary Anastasia O’Grady.  She wrote about the failure of President Luiz Inacio da Silva’s attempt to resurrect the financial transactions tax. His move failed because “elected officials are finally waking up to the fact that the government can’t squeeze the public forever.”  What is most amazing is that this good tax news comes out of Brazil.  That country’s tax burden as a percent of GDP is just shy of 35% and its average growth rate lurks near 2%. O’Grady says that Silva had to push for the tax extension because his political philosophy is “marinated in the same ‘equality’ theory of economics that motivates the U.S. left. This special brand of populism holds that raising taxes on the most productive sectors of the economy is the way to satisfy government’s unlimited appetite for more.”  She cites the finding of a World Bank study from last year that it takes the average Brazilian company more than 2600 hours to comply with the tax system.  A 2005 study by the U.S. Tax Foundation says U.S. business spend more than 3 billion hours to comply with just our federal tax laws—not including state and local.  People and companies have finite resources.  For every dollar and hour they spend complying with government tax law, that is one less dollar and hour they can spend being productive.  That productivity, in turn, benefits their customers, and so the cycle goes on to benefit everyone.  The same cannot be said of money pored into government compliance.  If Brazil is beginning to recognize this, then I have hope for that idea to take root elsewhere as well.

 

http://online.wsj.com/article/SB120148128843820973.html

 

“Inflation Ouch” --- May 5, 2008

 

There has been much talk lately of inflation.  It has been a mostly academic concept for the past several years, but now we are experiencing its bite at the grocery store as well as the gas pump.  I found a simple inflation calculator:

 

http://woodrow.mpls.frb.fed.us/research/data/us/calc/

 

I punched in 1967 and found that goods for which I had paid $1.00 that year would cost me $6.46 this year.   Applying that to state government expenses is even more frightening.  The total state budget that year was $4.7 billion.  (That is about 1/30th of this year’s state budget.)  That would make the growth in state government roughly 4.6 times the general inflation rate.  So while you are getting annoyed at having to pay more for milk, rice and flour, ask yourself if you are getting nearly five times the value in state services than you used to. 

 

Claremont Institute Panel – June 9, 2008

 

I had the privilege to speak recently at the Claremont Institute’s California Policy conference hosted by its Center for Local Government.  The day was designed to stimulate serious and candid discussions among policy experts and elected officials, and it certainly accomplished that. 

My panel delved into the thorny issue of the California economy: what can be done?  It is tempting, especially before a Claremont crowd of limited government advocates, to simply say that government should get out of the way.  Yet the situation requires a more complex view than that.  Indeed, we need both less government and more government to enable the economy to function more prosperously.

 

There is no arguing that California’s traditionally robust economy is at great risk.  We benefit from its diversity with strong segments in agriculture, technology, entertainment and tourism.  Even major earthquakes and fires are only blips on the statewide screen.  The risk is that the strength and resiliency we have had are being taken for granted.  There is also an incredible risk from the proliferation of government programs that are economic drains, including health & welfare subsidies and environmental game playing.

 

There are many areas where having less government would help.  Local government, especially, has prohibitive regulations for land use and building codes as well as onerous fees and taxes.  We require far too much in regulatory compliance from too many businesses. For example, the operator of a gas station with a convenience store has to get at least 33 separate permits or registrations from the city, regional, county, state and federal agents to operate. Energy rules and Employment Development Department oversight also weighs heavily on employers.  We also have property restrictions on both land and other items like guns that deny your freedom to full use of your property, because of the potential damage they might do rather than any actual damage done.  The state also has a convoluted understanding of contract enforcement.  Allowing landlords to contract only with non-smokers sounds like a good idea to many who hate the idea of tobacco, but those same landlords contracting only with a married man and woman instead of other random pairings of individuals is disturbing to many of those same people.  We have backed away from the sanctity of private contracts in California, and that is disturbing to those who value property rights and understand the critical role they play in securing opportunity and prosperity in any society.  Also, other than property taxes, taxes in California are shameful. We have the second highest personal income tax bracket in the nation (behind Vermont).

 

Despite all of that, there are areas where government should be doing more, or at least doing what it does better than it currently does it.  I look at the great examples of crime reduction by Chief Reuben Greenberg in Charleston, South Carolina and former New York City Mayor Rudy Guiliani, and I want to see that happen here. I want to see California prisoners working rather than lounging.  They need to learn the discipline, work ethic and skills they clearly missed out on earlier in life.  Education is not working. We need to rethink the whole system: eliminating compulsory attendance laws (see below), offering vouchers for alternative forms of schooling for everyone, and returning to city-run school boards with real decision-making power.  We need to have serious tort reform and insurance reforms spearheaded by government to enforce the principle that personal responsibility is pre-eminent and that civil trials for real damages happen quickly, not years later because of sandbagging and red tape.    Traffic congestion is not pre-destined. There are technological advances and automation alternatives that get held up for silly reasons.  Finally, government can do a better job at fixing our water problems by exploring changes to pricing, conveyance, and reservoirs. 

 

I am optimistic that we can make California’s economy stronger and help its people become wealthier, but I am scared that we will be too weak to do what it needed and end up exporting our wealth.  That is our choice.

 

TX v. CA Throwdown: We Lose – October 6, 2008

 

In a new study by the firm Arduin, Laffer & Moore Econometrics, an economic comparison between Texas and California shows that Texas is not only better economically, the two states are not even close.  Texas is better in terms of taxes on labor, taxes on capital, overall tax environment, regulatory environment, and government spending policies.  The only metric where California beat Texas is California’s taxes on consumption; CA is 32nd best out of the 50 states, and Texas is 34th.  The point of this is excessive taxation, regulations, and expenditures are bad for labor and capital, and for people in every strata of society, rich or poor. States fiercely compete with one another for jobs, businesses, and people.  These differences can decide whether a state has a flourishing or languishing economy.  The signs indicate Texas has a very bright future, California, not as much.

 

From the report:

 

“Texas’ overall economy has grown more than California’s since 1997—even including the impacts of the Internet revolution on California’s economy during the late 1990s. On average, Texas’ real economy grew 4.3 percent a year since 1997. California’s real economy grew a slower 3.7 percent and the nation as a whole grew a slower…. Since the end of the tech boom, the economic environment has skewed even further into Texas’ favor. Since 2002 (the end of the 2001 recession), real economic growth accelerated in Texas (5.0%) and the nation as a whole (3.1%). California’s economic growth rate remained basically constant at a still strong 3.6 percent. Income growth tells a similar story, albeit slightly more favorable to Texas…

 

“Real personal income in Texas has grown 4.2 percent a year on average between 1997 and 2007. This exceeded average personal income growth in California over this time period (3.4% and for the nation as a whole, 2.9%). Since 2002, Texas’s real personal income growth premium has expanded further as personal income growth has continued expanding 4.2 percent a year while real personal income growth has slowed in California (2.8%) and for the nation as a whole (2.6%). From a broad macroeconomic perspective, the Texas economy has been expanding at an accelerated rate compared to California and the nation overall.”

http://www.texaspolicy.com/pdf/2008-09-CompetitiveStates-laffer.pdf

 

A Blogger’s Expansion of the Laffer Curve – December 1, 2008

 

I saw Don Luskin link to this wonderful blog, the Crier Curve, “An Engineer’s Look at the Laffer Curve:

http://criercurve.blogspot.com/2008/11/engineers-look-at-laffer-curve.html

 

The Laffer Curve is just tax revenue as a function of tax rate. At a tax rate of zero, the government’s revenue is obviously zero. At a tax rate of 100%, the government’s revenue is also zero since there would no longer be an incentive to work.  Therefore, a curve exists between a zero and 100% tax rate with a maximum level of revenues at some rate between.  But what the optimal tax rate for government to maximize its revenues is not necessarily what is optimal for us, or for the economy, and this is a consideration of Laffer I have not seen until now.   The anonymous blogger uses the mathematical relationships implied in the old Laffer Curve to prove there are three optimal tax rates depending on what you want to optimize:

 

t(c) is the tax rate at which the most money remains in private hands;

t(e) is the tax rate at which the overall size of the economy is maximized;

t(g) the tax rate at which the government optimizes its revenues. 

 

Thus, t(c) is always lower than t(e) which is lower than t(g).  

 

One thing this hinges on is a belief that some level of government service is necessary for the good of the economy.  Defense, police, courts and transportation are probably the ones the author assumes would make a higher tax rate than t(c) produce a larger overall economy.  The main assertion I think works regardless -- no matter the shape of those curves, the tax rate that maximizes tax revenue hurts the overall economy.

 

If I were a business or economics teacher, I would spend at least a week on this.

 

A  Much Better Way to Do Stimulus --- December 8, 2008

 

With the massive bailout of America’s financial industry now passed by Congress to a very uncertain future.  The federal legislators have moved on some vague ideas of an economic stimulus package for the rest of the country.  

 

Most are re-runs of the usual ideas to speed up public works construction projects, and giving money to states and local governments to build things.

 

Newt Gingrich brought to my attention a truly innovative alternative stimulus plan by Rep. Louie Gohmert (R -TX).  Gohmert has calculated how much of a tax holiday Americans could receive as a substitute for the proposed $1.05 trillion dollar federal bailouts.  He concludes for the price of the bailout we could have a tax holiday for half of next year, January through June.  No income tax and no FICA.  Gingrich estimates this would typically amount to about 33% of a typical families’ income.  In terms of a jobs stimulus, no business would pay matching FICA for six months either.  

 

A tax holiday is not necessarily the most fiscally conservative thing to do in light of our massive obligations.  However, if we are going to do stimulus, I agree with Gingrich, this is how we should do it.

 

So, for the cost of the two plus big bailouts on the table, every working American could have 33% more take-home cash for six months to choose the car they like best (General Motors or not), take a vacation, work on the house, save and invest, etc.  It seems much less of an economic gamble to allow people to direct money into the economy as a function of their own earning power and choice.  If the result of this tax holiday is that, say, Apple does well, but GM does not, then Apple is the kind of company that will grow jobs because there is real consumer demand.  Another way of putting this is the best long term solution for the American economy is to allow reality to flourish unmolested. 

 

Send an email to your member of Congress.  They know the public does not support corporate bailouts, but we have seen before how support for bailouts is justified by the lack of alternatives on the table.  Gohmert has introduced legislation to re-direct the balance of the bailout funds in favor of a tax holiday.

 

http://gohmert.house.gov/Article.aspx?NewsID=1355

 

I Am a Bailout Surrender-Monkey --- December 15, 2008

 

Kudos to Christopher Cox, the current Securities and Exchange Commissioner, for his article in last week’s Wall Street Journal, “We Need a Bailout Exit Strategy”

http://online.wsj.com/article/SB122895345612296365-email.html . 

 

I could uncharitably lament Cox is too late -- but I appreciate the reminder that America became strong not by virtue of a command economy, but through free enterprise.  Cox warns us that the current federal interventions should only be temporary and a clear exit strategy is needed to prevent a permanent power grab over the economy by the federal government.  I add that those who stayed away from the junk debt and kept the powder dry should be allowed to come in and take over the assets of the bankrupt companies.  That is American capitalism.    

 

So, I agree with Cox.  The bailout system as proposed by Congress already looks like a quagmire.  Senator Reid’s and Speaker Pelosi’s war prescriptions would have been terrible for the Iraqis, but the same spirit of surrender applied to the financial crisis would get it over sooner and allow us to emerge stronger than before.  We need an exit strategy, and a timeline for withdrawal.  Wall Street needs to step up and provide for its own security.  Admit defeat on the bailouts and withdraw federal support immediately. 

 

The consensus on the right is that nationalizing American companies with tax dollars will not work.  We do not even want it attempted.  Republicans should proclaim it loud and proud:  We are bailout surrender-monkeys.

 

Join the Facebook group:  http://www.facebook.com/home.php?#/group.php?gid=57417167320

 

The Stockholm Tax Tutorial --- December 15, 2008

 

Despite our domestic troubles, we cannot afford to take out eye off the ball internationally.  With all the focus on California’s problems you may have missed the announcement that Sweden proposes to fix its troubled economy by slashing business, personal income and payroll taxes.   The leader of the country’s liberal party said that among these, the corporate tax rate has a very large effect because that is the tax large companies really look at before they set up business.  The corporate tax cut will bring their rate down to 26.8%, from a high of 57% in 1987.  With the cut, the Swedes will have a corporate tax rate one-third lower than the U.S. average of 39.5% (federal rate plus state average), according to the Wall Street Journal.

 

I encourage President-elect Obama to bone up on tax policy through visits to Sweden and Ireland.

 

http://online.wsj.com/article/SB122264826575484095.html