November 26, 2004
A National Sales Tax... Revisited One More Time
My second post on a national sales tax once again generated quite a response. Before I address the subject for a third time, I must say that a national sales tax, as proposed at FairTax.org, would not be my preferred form of funding the government. Ideally, I'd like the government to be funded through voluntary means such as contract insurance and national lotteries. However, these proposals are far fetched in today’s fiscal environment and as such a revenue neutral sales tax holds much more promise.
Many of the concerns over a national sales tax expressed by several of my readers I formerly shared myself. Specifically, two concerns were at the forefront of readers’ responses. First many were concerned that a consumption tax would shift the burden of taxation towards the poor and the middle class. Secondly, there was a concern that the U.S. is a consumption driven economy, and as such a tax on consumption would have detrimental effects on economic growth. As mentioned above, I originally shared both concerns when learning about a national sales tax. In fact, initially, they led me to believe such a tax should not be implemented. But upon further study I have changed my mind on both accounts.
In addition to the critiques above, another criticism was that under a sales tax those who "work for a living" would be responsible for the entire tax burden, while rich investors would be off the hook to live tax free. This analysis can easily be turned on its head by simply reviewing the nature of the tax.
Below I will address all these concerns.
But one thing to keep in mind during the discussion is that the purpose of taxes is to fund a functioning government that protects our rights and allows us to live peacefully amongst one another. I think we all can agree that the creation of a tax policy, that both fairly and efficiently raises this revenue, is a common goal we all can share.
Won’t a National Sales Tax Shift the Burden of Taxation to the Poor and Middle Class?
Looking at the most recent data from the IRS, this indeed could be a cause for concern.
As we can see the top 1% of income earners paid over a third of the total income taxes collected by the IRS. Conversely, the bottom half of the income scale pays a scant 3.5% of total income taxes. Any reforms to broaden the tax base would then seem to surely increase the burden on lower income individuals.
One thing to remember though is that the income scale above does necessarily translate into a scale from rich to poor. To demonstrate this point, imagine a family where a husband and wife both work, earning $55,000 and $40,000 respectively. This would put their household in the top 10% of income earners, but it would not mean that they are wealthier than 90% of the country. In fact if they are putting a child through college, have a mortgage, a car payment, etc., finding dollars to spend at a country club would probably be impossible. Similarly, take a family where the head of the household is unemployed, but they sell their home for a one time capital gain of $150,000. While this would push them into the top 5% of income earners, the comfort of this cash windfall would most likely be short lived.
Conversely, consider a retired couple who owns their home outright, has very few expenses, and retires with a pension of $50,000 a year. While this would place them lower on the income scale than the families in the two examples above, who could seriously argue that they are poorer?
This is a key flaw in our current tax system that is partially addressed in the article authored by Baum. Each individual with a valid social security number would receive a check from the government, reimbursing them for their taxes paid on purchases up to the poverty level. Therefore the poor, as defined by the Census Bureau, would pay no taxes. For a family of four the poverty level is currently $18,810 a year. A family that made $100 over this level, and decided to spend that money on a new television would pay a total of $23 in taxes (an effective tax rate of 0.12%). A family that made $1,000,000 over the poverty level and decided to spend it all on a new yacht would need to pay $230,000 in taxes (an effective tax rate of 22.58%).
So while the truly poor would face a minimal tax rate, if any at all, what about the middle class? Here I must defer to calculations on the fairtax.org website. They compare various middle income families' tax returns under the proposed national sales tax and the current system. The results look very favorable and can be viewed here.
Now can I vouch for these calculations personally? While they look correct, there certainly could be something that I am missing. But taken at face value, at the bare minimum, they show promise. If we find there is a segment of the population that would be unjustly burdened under the plan, we could (and should) tweak the minimum refund level to address these concerns.
Of course, it would also take quite an effort to reform the current tax code but in my opinion the benefits would outweigh the costs. The question that follows is what are the benefits that make it worthwhile?
A flat national sales tax would have the enormous benefit of simplifying the tax code. It would eliminate both the wasteful spending of billions upon billions on tax compliance and a 45,622 page tax code that not even the most intelligent tax lawyers and accountants can understand. But what intrigues me most about such a tax it would shift taxation to consumption, rather than savings.
But if Consumption Drives the Economy, Won't a Sales Tax Kill Economic Growth?
It is an excellent question. For even if a national sales tax could be implemented without shifting the tax burden to the less fortunate, could it not have disastrous economic consequences? It’s said that consumption drives the economy, and thus taxing it would seem to surly hurt economic growth.
To take this viewpoint though is to ignore the important role that savings play in consumption. Let’s take the most obvious example: the housing market. Would it be possible for the average middle class family to buy a house if they had to do so out of their present income? Clearly the answer is no. Yet everyday people pay for expensive items such as houses, cars, large appliances, or college tuition that exceed their disposable income. How can this be? They can do so by relying on the savings of others to finance these purchases. Without savings, consumption of these expensive items would be severely limited, if not impossible.
Similarly, a majority of the country earns a living by selling their labor (i.e. they receive wages). The majority of these wages are then used to consume goods that are essential (such as food, shelter, medical, etc.) or for pleasure (i.e. entertainment, vacations, etc.). But wages would also be impossible without savings. Factories and businesses that employ so many of us could not be constructed without a source of funds. In addition, wages themselves could not be paid if the owners had not put money aside to pay them. Products take weeks, months, even years to produce before they are finally sold for a profit. But employees don’t need to wait until the product is sold to collect their wages, they are paid out of savings. Can you imagine how poorly the economy would function if everyone had to wait until the final product they helped to produce was sold in order to collect the money they had earned? Such an economy would fall apart.
This is not to demean those who earn wages compared to those who save in any way. Clearly, saving money wouldn’t do much good if there was nowhere to invest it. And more importantly, this classification ignores the fact that these groups are often one in the same. I’m simply pointing out that savings are key to any economy and to consumption, no matter the source of the funds.
For me it is always easiest to look at such a system in very simple terms. Imagine an economy that is represented by one farmer with one product: corn. The farmer can use the corn he possesses in one of two ways. He can eat the corn to feed himself or plant it to grow more corn for the future. Now obviously if the farmer were to eat his entire supply of corn he would have none to plant, and while content today, he would starve in the future. On the other hand, if the farmer were to plant his entire supply of corn, he would starve before he could reap the future benefits. Clearly, there is a trade-off. That which is planted (i.e. saved) needs to produce enough in the future to equal his current consumption. If the farmer plants enough so that the future yield is greater than his current consumption, not only will he be able to consume more in the future, he will be able to save more as well. By saving, his corn field will grow larger than it is today… and this is equivalent to economic growth.
Now our economy consists of much more than corn but the analogy is still valid. By saving instead of consuming we increase our capital stock. Our savings flow into the technologies, factories, and business of tomorrow and that allows us to both produce and consume more than we currently do. Wealth is created. Again, this is the definition of economic growth and savings is what spurs it.
To look at it another way it’s beneficial to everyone if someone who has earned a small fortune invests $500,000 in a new company that creates products and expands our economy. If instead they use this money to buy a new sports car they are spending their money not on something that will create wealth, but something that will be of use only to themselves and will be worth less and less as it is worn out. We're all better off if this rich individual saves his money, for it benefits us all.
And remember, if you want people to stop smoking, tax cigarettes and people will do less of it. On the flip side, if you want people to save, make savings tax-free and people will do more of it. That’s the essence of a national sales tax.
The Rich Will Live Tax Free
"...to me it is morally wrong to say that if you work for a living you should pay taxes, but if you are rich and live off of other peoples [sic] work you shouldn’t. "
This was the conclusion of a rant against my previous post on a national sales tax over at San Diego Politics by friend Patrick Finucane. I'm not sure that he realized it, but he actually makes a strong case for the sales tax he is trying to demonize.
Even ignoring the erroneous Marxian undertones, the statement is still absurd as proven by the discussion above. Missing from Pat’s analysis is the straightforward fact that the reason people save and invest their money now is so that they can spend and consume products in the future. If someone has saved $20,000 and they pull this money out of the bank to buy a new car, they will pay taxes, even if they are the richest person in the world.
If you’re worried about the wealthy not paying taxes you need look no further than our current system. A family with $10,000,000 in municipal securities (i.e. state and local bonds) pays absolutely no federal income taxes. If these bonds yielded 5% this would mean an annual income of $500,000 without paying a dime in taxes. If you think this is an unrealistic assumption, think again. The Kerrys, who are worth hundreds of millions of dollars, had an effective tax rate of a little over 12% last year. This is lower than the average rate of a middle class family from the most recent IRS data. Their tax rate was so low largely because they were invested in tax free bonds. Even taking away municipal securities, wealthy individuals can afford tax attorneys that can help them redefine income, or stash it offshore. These are options not available to the poor and middle class.
Implying that the basis for a national sales tax is that the “rich” shouldn’t pay taxes is blatantly false. The basis is that when anyone invests and saves their money (something that helps the economy grow and thus helps us all) they should not be taxed. But everyone is taxed when they spend their money consuming what we could call luxury items.
In short, the rich in no way get off tax free.
… I realize there needs to be a debate on this issue and I myself have many more questions. I do believe though that some of the initial fears are overblown. I’m looking forward to a vigorous discussion on this issue, as I think it’s clear that our current system of taxation is in dire need of repair. Undoubtedly, we could surely do better than our progressive income tax. Hopefully I’ve demonstrated that a national sales tax might be a viable replacement that would make us all better off.
 Keep in mind that while I am focusing on income taxes, the proposed Fair Tax would replace "the entire federal income and Social Security tax systems, including personal, gift, estate, capital gains, alternative minimum, Social Security/Medicare, self-employment, and corporate taxes."
 I understand that the tax free status means a lower yield but the point is that no taxes are being paid to the federal government.
Additional note: I owe much to the teachings of George Reisman and his book Capitalism for the discussion on savings and consumption.
November 25, 2004
Be Thankful For Private Property
Happy Thanksgiving to everyone. Today I thought I would link to another Caroline Baum article. As she does every Thanksgiving, Baum published her piece showing how incentives had much to do with creating the holiday that is being celebrated across the nation today.
Relying on the log of William Bradford, the second governor of the Plymouth Bay Colony, Baum shows how the transition from harsh winters accompanied by starvation on to bountiful harvests was not a matter of luck. A change from communal farming to a system of private property played vital role.
The land of the colony was at first communally farmed, a common tradition that the Pilgrims had brought with them from England. Bradford writes that such a system:
“was found to breed much confusion and discontent, and retard much imployment that would have been to [the Pilgrims'] benefite and comforte”
Knowing that something had to be done, it was decided that the land would be divided up, giving each family their own plot. This system, which allowed each individual to grow food for themselves and sell any excess for a personal profit, had an amazing effect. Again Bradford notes:
``This had very good success; for it made all hands very industrious, so as much more corne was planted than other ways would have been by any means the Govr or any other could use, and saved him a great deall of trouble, and gave far better content.''
After three horrifying winters, things had permanently changed. As Baum concludes:
Given appropriate incentives, the Pilgrims produced and enjoyed a bountiful harvest in the fall of 1623 and set aside ``a day of thanksgiving'' to thank God for their good fortune.
``Any generall wante or famine hath not been amongst them since to this day,'' Bradford writes in an entry from 1647, the last year covered by his History.
With the benefit of hindsight, we know that the Pilgrims' good fortune was not a matter of luck. In 1623, they were responding to the same incentives that men and women still respond to almost four centuries later.
This is a lesson that, at least I for one, had never learned about Thanksgiving until I read this piece a few years ago.
November 24, 2004
More on Shrimp
Radley Balko links to a piece he wrote for A World Connected on the domestic shrimping industry. Not only does he review the recent tariffs placed on imported shrimp, but he ties in H2-B visas, soybeans, and other unintended consequences. It’s well worth the read.
November 22, 2004
Ban The Electoral College?
A letter to the editor of the WSJ today makes an interesting observation regarding federalism and the U.S. Senate:
I always find it remarkable that so many people call for ending the "unfairness" of the Electoral College but you almost never hear these same people calling for the abolition of the U.S. Senate. If the Electoral College is "unfair" when California gets 55 electoral votes and Delaware gets three, isn't the Senate far worse, where California gets two votes and so does Delaware? Is it "fair" that in the last election one candidate won a Senate seat by getting 121,000 votes, while another lost despite getting 3.5 million? But that's federalism for you.
Thomas F. Harrison
November 19, 2004
More to Come...
Later on this weekend I'll be responding to some thoughtful responses I've received regarding my posts on a national sales tax. In the meantime, I thought I would put up a quote I pulled off of Trey Givens' site (unfortunately Givens is currently on a blogging break).
"When somebody persuades me that I am wrong, I change my mind. What do you do?"-- Economist John Maynard Keynes
Update: Instead of later on this weekend, make that the beginning of next week.
November 18, 2004
Is a National Sales Tax Realistic?
A Stitch in Haste took me to task on my post on flat taxes from a few days ago. In his post, KipEsquire questions the logic behind the quotation I lifted from a Bloomberg article saying that the poor would be exempted from both a flat income tax and flat sales tax:
I found this statement utterly bewildering. How exactly do you give the poor, or anyone else, an exemption from a sales tax?
You exempt products from a sales tax, not people. Is the point that “basic necessities” (i.e., what poor people spend their money on) will be exempt? If so, then you can’t simultaneously argue fairness for the poor and simplicity, since a sales tax peppered with exemptions meant to ease the tax burden on the poor will not be simple, it will be very complicated.
Look at any state that has less than a ubiquitous, prophylactic sales tax, and you find a complex web of lists, exemptions, schedules, etc., often the result of politics and lobbying more than common sense... Not a road I’d like to see the federal government go down, given its track record with the Internal Revenue Code (currently at 2.8 million words and growing).
While I agree the wording sounds off, I just assumed that exempting the poor meant exempting products deemed as necessities (i.e. food, medical, housing). As for this leading to a complex list of exemptions, the sales tax out here in California seems to work fairly well without too much confusion. Why not use it as a blueprint.
Yesterday though, Caroline Baum wrote a follow up to her original article that I quoted. She reviews a sales tax proposal called the FairTax currently sitting in Congress and addresses several of the topics discussed above:
A bill to do just that -- and abolish the Internal Revenue Service to boot -- has been introduced in the House of Representatives (H.R. 25) by Congressman John Linder, Republican from Georgia, with an identical bill in the Senate (S. 1493).
Under the FairTax, workers would take home their entire paycheck; nothing is withheld.
Instead of paying taxes on income, Americans would pay a 30 percent mark-up at the cash register on new goods or services. (The sales tax would be 23 percent if expressed as an income-tax equivalent.) Used goods aren't taxed. Neither are business purchases.
That sounds like a big loophole. (``The Porsche is not a recreational vehicle. It transports key documents to and from the office every day.'')
And perhaps it is. Unfortunately, there is no tax system that's immune from non-compliance. It's only a matter of degree.
No one pays tax on consumption up to the poverty level under the FairTax. Every U.S. resident with a valid Social Security card gets a monthly rebate to cover the tax on purchases of essential goods and services.
Read the entire article if you get a chance.
What ultimately attracts me about the idea of a national sales tax is that A) it seems fair and B) investments would not be taxed, which would be great for economic growth. I agree with KipEsquire that there are undesirable issues with the tax (i.e. 30% seems high to me) but I'm not willing to write this plan off yet. To the contrary, the more I read, the more appealing it sounds.
November 17, 2004
This weekend I finished Cowboy Capitalism: European Myths, American Realities by Olaf Gersemann. As the title suggests, Gersemann, a German financial reporter, takes on many misconceptions relating to comparisons between the U.S. and European economies.
The book was informative and well worth the read, but it's also the type of book that makes me wish I had a photographic memory. While it's impossible to remember all the statistics put forth, I'll definitely have it on the shelf and ready to go as a reference.
Here is an example which was one of many that was surprising when I first read it. On page 59 Gersemann writes:
An American entrepreneur setting up a new business faces a one-time regulatory cost that amounts to 1.7 percent of the annual U.S. per capita income. In Germany the corresponding number is 32.5 percent. In France and Italy it is even higher at 35.6 and 44.8 percent respectively. Those numbers represent significant barriers to establishing new business enterprises
The magnitude of those numbers is shocking and is clearly part of the reason for higher unemployment rates in these countries relative to the U.S.
One other note, while the inside flap of the dust jacket states that the book is a "devastating rebuttal to the stereotypes promoted by the likes of Paul Krugman and Michael Moore", it is not a partisan attack on the American Left. In fact, when economist like Krugman or Joseph Stiglitz are quoted it's done in a positive way, using their expertise to backup the books' assertions.
November 15, 2004
Helprin and Art
Last week my brother met Mark Helprin, one of my favorite authors, at a book signing in the Bay Area. Apart from being an imaginative story writer, Helprin incorporates artwork into his novels in a way that makes me wish he was an art history professor back when I was in college.
With the current state of affairs in Iraq, I was reminded of the conclusion of this essay where he gives a special meaning to one of Winslow Homer's masterpieces:
When I was in the army, many years ago, I was an infantryman, and in the course of what I saw, and did, and came to understand, I was broken. Sometime after I had returned to the United States and my life had resumed, I rounded a corner in the Metropolitan Museum in New York and saw a painting I had known all my life but which I had not until that moment been able to understand. This was Winslow Homer’s masterfully restrained portrait of a veteran returning to his fields. The generation touched by fire in the Civil War understood the great import of this painting, they knew why the veteran had his back turned to the painter, why he was alone, why he worked in utter quiet, why the light was so clear, the scene so tranquil. After years of war and destruction, they understood, and after having passed this painting for the first time as a man, so did I.
As if there had never been a Gettysburg, an Antietam, or a Chancellorsville, the light struck the soil and the wheat grew. The world was the same. The essential rules had not changed. Devastation had not triumphed. The veteran could return to his fields, and the answer to his tentativeness was that, as if by a miracle, they were now even richer than he had remembered them.
Update: My brother just forwarded along another relevant quote from Helprin. It is from a speech called "Defend Civilization Itself" and is equally poetic and powerful:
If civilization can be attacked on many fronts, it can also be defended on many fronts, and to do so you need not necessarily drop into Afghanistan by parachute or found a political party. Last summer, in Venice, I was walking from room to room in the Accademia, which, unlike timid American museums, throws its windows wide open to the light and air of day. As if to bring even further alive the greatness and truth of the Bellinis and the Giorgiones on the walls, the galleries were flooded with music. As is most everything in Italy, it was unofficial. It came from a guitarist and a soprano on a side street. He played while she sang gloriously Bach, Handel, Mozart, and anonymous folk songs of the 18th Century. Because it was music, I cannot properly convey to you how beautiful it was, but it was accomplished, precise, and infused with the ineffable quality that lifts great art above that which merely aspires to or pretends to be great art. I could not see them from the windows, but when, several hours later, I went outside, they had neither ceased, nor skipped a beat, nor produced a single false note.
They were impoverished Poles, who appeared to be in their late twenties. She was thin, sharp-featured, and hauntingly beautiful. Most people simply passed them by, some dropped a few coins in a basket at her feet, and the visitors to the Accademia had no idea who they were, but she sang as if she were bathed in the footlights of La Scala, where she should have been, and where someday she may be. It did not matter that they were unrecognized, that they sang on the street, or that they were desperately poor, because that day in Venice they rose above everyone else, except perhaps the saints. In this they shared a brotherhood with the American soldier who made the first parachute jump, in the dark, into Afghanistan. For they and he were defending the civilization of the West, and they and he are inextricably linked. Without the soldier, they could not exist except in subjugation, and without them, he would not have enough to fight for.
November 11, 2004
Flat and Fair?
Caroline Baum takes a look at the possibility of a flat tax on income or consumption. Could it be done fairly?
Any attempt to lower the tax rate, broaden the base (by eliminating deductions) and effectively tax consumption produces cries of ``unfair.''
And it's a legitimate criticism from a nation steeped in a progressive, graduated income tax system. The poor can't save; they spend everything they earn. A sales tax would be regressive.
Even in the pure flat tax envisioned by Hall and Rabushka, ``there are two brackets: zero for the poor and 19 percent for everyone else,'' Hall said.
Under either a flat tax or sales tax, the poor would be given an exemption ``that recognizes the right of a family to provide for itself before it provides for the government,'' said Pete Sepp, vice president for communication at the National Taxpayers Union, a non-partisan advocacy group in Washington.
November 10, 2004
I've been busy of late and have not had time to get up some posts I've been meaning to write. In the meantime, to keep the posts coming I thought I'd put up this quote from Atlas Shrugged. The quote was used as inspiration by Lori Ann Muenzer who won a gold metal for Canada in track cycling this year. It was read on the air during the CBC coverage of her event.
"Do not let your fire go out, spark by irreplaceable spark, in the hopeless swamps of the approximate, the not-quite, the not-yet, the not-at-all. Do not let the hero in your soul perish, in lonely frustration for the life you deserved, but have never been able to reach. Check your road and the nature of your battle. The world you desired can be won. It exists, it is real, it is possible, it's yours." -- Ayn Rand, Atlas Shrugged
Hat Tip: TIA Daily
November 9, 2004
The Coming Dollar Collapse?
Around the web several pundits are acting as if an eminent dollar collapse is all but a certainty. At Tilting at Windmills for example a post states:
- The U.S. dollar is overvalued and therefore likely to fall.
- This decline is estimated to be about 30% over the next year. This is more than enough to wipe out any gains my funds might make in the stock market over that time.
- The weakness of the dollar is becoming common knowledge.
- Europe and China seem unwilling to intervene. We'll know soon if the Japanese are willing to do so.
Now, I'm not going to try to pretend that I know where the dollar is going, but if this is true there is sure a lot of money to be made. Here are the Euro FX Futures trading on the Chicago Mercantile Exchange:
What this is saying is, right now, the markets look for a very slight decline but still have the dollar hovering around its current exchange rate of 1.29 $/Euro. If you click through to the site, the Japanese Yen futures are trading around 103 Yen/$ a year out. This is down from the current exchange rate of 106 Yen/$, but not a 30% drop.
Can the futures be wrong? Yep. In fact they are all the time. But if they are wrong, everyone so sure that the dollar will collapse can make money hand over fist if their beliefs are correct. If they think the collapse is going to happen over the next 6 months they can buy call options on the futures and make even more.
The point being that while the dollar collapse may be "common knowledge" in certain circles, it's far from crystal clear.
Fifteen Years Ago Today
Tim over at Freespace has a good post on the fall of the Berlin Wall, relevant as today is the 15th anniversary of this event.
When I visited Berlin in early 1999 what amazed me was the complete absence of most signs that the wall even existed. They had preserved a few sections but they seemed to be few and far between. In most areas, the only tip off that you were near its previous location was a multitude of cranes and recently constructed buildings. A local told us that where the wall and the buffer zone had been was now the most active construction zone in the world.
While the progress was nice to see, it would have been beneficial to see a clearer reminder of the monstrosity that divided East and West Berlin.
November 8, 2004
They Made America
I just watched the first episode of the PBS series They Made America. It's a series that is premiering this week focusing on great innovators that changed the direction of this country. The opening segment featured the stories of Ted Turner and Russell Simons. The documentary shows how both had the ability to see a niche ignored by the mainstream, persevere to make it a success, and then once they accomplished their goals both continued to innovate so that they could maintain their success. It looks like the rest of the program, which continues tomorrow, should be interesting.
November 7, 2004
Wal-Mart: A Love/Hate Relationship
The opening of a Wal-Mart store near the Aztec pyramids of Teotihuacan has caused quite an uproar. Much attention has been given to the controversy as it is a symbol to many of the encrochment of corporate America upon the rest of the world.
But of course there are always two sides to every story. Quite a few people must be in favor of allowing the Wal-Mart to open or there would be no point in building it in the first place. Stores need shoppers in order to survive. This article from the AFP does a good job of showing why the store is desirable to some:
In San Juan Teotihuacan "there are few stores and everything they sell is very expensive," Maria Felix Nieves, a homemaker at the opening, told AFP.
"Bodega Aurrera" is only 2.5 kilometers (1.5 miles) from the famous pyramids of the Sun and the Moon and a nearby artifacts-rich archeological site.
"The truth is that the people who opposed (the opening) don't care that we're poor and in need of cheaper goods," said Estrella Torres who was checking out kitchen appliances at the store.
Despite a gruelling six hour wait in sunlight, the first people streaming into Bodega Aurrera were all smiles as they went about buying food, diapers, kitchenware and cleaning products.
The article also points out that many locals have dismissed the controversy as several of those protesting the opening of the shopping supercenter are in fact local merchants who will now be forced to compete. Judging by the expressions on the faces of those entering the store through a line of cheering Wal-Mart employees, I would say the local merchants' fears are valid. Click on the pictures to read some of the telling captions:
November 5, 2004
The Republicans Take Control
While I was thrilled to have President Bush stressing privatizing social security and overhauling our tax code in yesterday's press conference, I couldn't get this quote by P.J. O'Rourke out of my head:
The Democrats are the party that says government will make you smarter, taller, richer, and remove the crabgrass on your lawn. The Republicans are the party that says government doesn't work and then they get elected and prove it.
Speaking of O'Rourke, he recently interviewed Secretary of State Colin Powell in the The Atlantic. Here's an excerpt:
SECRETARY POWELL: ...But our great strength is the image we still convey to the rest of the world. Notwithstanding all you read about anti-Americanism, people are still standing in line to come here, to get visas and come across our borders.
P. J. O'ROURKE: Voting with their feet?
SECRETARY POWELL: Voting with their feet. So there's something right there.
P. J. O'ROURKE: Back in Lebanon in 1984, I was held at gunpoint by this Hezbollah kid, just a maniac, you know, at one of those checkpoints, screaming at me about America, great Satan, et cetera.
SECRETARY POWELL: Then he wanted a green card?
P. J. O'ROURKE: At the end of this rant, that's exactly what he said: "As soon as I get my green card, I am going to Dearborn, Michigan to study dental school." And he saw no disconnect.
SECRETARY POWELL: He's there now. He's not going back to Beirut.
P. J. O'ROURKE: He hated America so much and wanted nothing more than to be an American.
SECRETARY POWELL: They respect us and they resent us. But they want what we have.
November 4, 2004
From Picking to Profits
It is always good to see a reminder that the American Dream is alive and well. Here's a story from the area in which I grew up:
The California wine industry was built on the hard labor of a largely Mexican seasonal work force. But the rise of the fine-wine business created a growing demand for year-round workers with special skills in Napa and other regions. Many former migrant workers settled in wine country. They sent their children to school and taught them how to tend the vines. Some saved money and bought land, and soon they began growing their own grapes.
Ceja Vineyards' first wines came out in 2001. The year before, the Robledo Family Winery, owned by Reynaldo Robledo Sr., a former migrant worker, offered its first bottles for sale. Also in 2000 Salvador Renteria, who came to the Napa Valley as a field worker in 1962, and his son, Oscar, offered their first bottle of Renteria Wines cabernet sauvignon.
Alex Sotelo, who arrived in the Napa Valley as a field worker in 1991 and is now the winemaker at the Robert Pecota Winery, soon will sell his own wines under the label Alex Sotelo Cellars.
Their tales are new versions of a familiar story, in which the children of immigrants, by working hard and celebrating the virtues of family, achieve the American dream of ownership.
November 3, 2004
Do Sanctions Really Work?
Despite decades of trade sanctions against the island of Cuba designed to punish the government, Fidel Castro still dines like a king each-and-every night.
Now comes word that Nobel Peace Prize winner Shirin Ebadi is unable to publish her memoirs in America due to the U.S. embargo against Iran. She has filed suit against the U.S. in an attempt to get the book published:
She has completed a draft of the book in Farsi but needs the help of an agent and editor in America to translate and re-write the book for international readers, she said.
But Office of Foreign Assets Control (OFAC) rules are blocking her from signing a contract with the Boston-based Strothman Agency, which wants to represent her and negotiate with publishers on her behalf.
Her book highlights, through first hand accounts, the brutality of the Iranian government. That makes this story all the more bizarre.
The embargo against Cuba has given Castro a scapegoat for the poverty he has wrought on the island, while the embargo against Iran is keeping a Nobel Peace Prize winner from exposing the governments gross violation of individual rights. Who's exactly supposed to be reviewing the efficacy of these laws?
November 2, 2004
Markets & The Election: Part III
Or maybe not...
Markets & The Election: Part II
Speaking of markets... this from Tradesports.com makes it look like Kerry has it in the bag.
Markets & The Election
This morning, polls released on Ohio made it look like Bush was strengthening his lead in the state. But around 2:30 EST Drudge and other internet sources showed that the first round of exit polls were pointing towards Kerry. Think Wall Street was paying attention?
November 1, 2004
Limping To The Finish Line: A Last Minute Election Commentary
Here is my last minute rambling take on the tomorrow's presidential election. I for one will be glad when this thing ends in the next few days.
As I believe the majority of my friends will be casting their ballots for Sen. John Kerry tomorrow, I thought I'd pay special attention to some of his stances on the issues. There are certainly many reasons to cast your vote against Bush. If you need any evidence you need look no further than the first paragraph of this post, which actually turns into an endorsement for the President.
But while I'll concede there are many reasons to vote against the President, that doesn't necessarily mean that Kerry is proposing ideas that are worthy of voting for. Below I've highlighted some of the key issues:
The War in Iraq: If Bush loses the election tomorrow, the deciding factor may very well be public opposition to the war in Iraq. Using the military preemptively is a contentious issue to say the least and very worthy of debate. My problem with Kerry and the Democrats is I don't see them taking a principled stance against the war.
To start off with, I personally believe that if 550 votes would have swung the other way in Florida in 2000, we still would be in Iraq today. Sound ridiculous? Gore himself campaigned on the importance of removing Saddam from power and it's not that farfetched to think that after 9/11 he might follow-up on his promise in the name of U.S. security. In this parallel universe we would currently have Republicans complaining that Gore didn't have enough troops while Democrats would be defending the war effort in hopes to get Gore reelected. Looking at it in this context one realizes that much of the debate today is really about political gain, not policy decisions.
But back to reality. Gore didn't get elected and Bush did make the decision to invade Iraq. The debate today focuses on the existence of WMDs and whether or not we had a proper coalition. My problem is that I do not believe this was the true thrust behind invading Iraq. In my opinion, the Bush Administration knew full well that countries such as Iran and North Korea posed more serious threats than Iraq in its previous state. Iran is clearly a larger state sponsor of terrorism than Saddam ever was. In terms of WMDs, you have to ask yourself, why is it that a country with oil so readily accessible takes such an interest in nuclear power?
Why then did we go after Iraq first?
First, there was no need to sell Saddam Hussein as a bad guy to the American public for we already knew all about him. The public was already convinced Saddam was a psychopath at the helm of an oil rich country. It doesn't take a genius to realize that removing him from power and in his place leaving a democratic government of free individuals would be a good thing for not only the people of Iraq, but for the safety of the U.S. and the world as a whole. Secondly, I believe this administration felt that a free-Iraq was a way to deal with Iran without firing a shot. They believe in the domino theory with regards to freedom, a point Bush has stressed throughout the campaign.
Obviously these positions are debatable. I for one believe the military should be used as a defense against an attack on our country or to thwart an eminent threat. And of course you don’t just snap your fingers and presto… a democracy appears that respects individual rights.
These are issues that need to be debated, but where does Senator Kerry stand? I couldn't tell you.
Kerry is now against the war in Iraq as he feels the President rushed to war without a strong coalition and "without a plan to win the peace". I’m still trying to figure what that means. It’s all the more confusing though when you realize Kerry supported the war in the Balkans even though the UN Security Council wouldn't give it a seal of approval. More recently Kerry criticized Bush for not sending more troops to Haiti. Bush to his credit defends his decision to go into Iraq on the basis of national security. No such claim can be made for the Balkans or Haiti so the question remains unanswered: By what standard would Kerry send our troops into harms way? He hasn’t answered that question.
What I don't believe is the Republican claim that a Kerry administration will be a disaster in terms of our security. But if you plan on voting for Kerry on the basis that war is such a serious issue that our military should be used as a last resort, to put it plainly, you have the wrong candidate.
Social Security: No one denies that Social Security is going bankrupt except politicians running for office. The country would need an extra $11 trillion dollars today in order to make up for the difference between what Social Security has promised to pay out in bennefits and what it will take in through taxation. To put that into perspective that is nearly three times as large as our national debt. Luckily for today's politicians these unfunded liabilities are allowed to be kept "off balance sheet" and are not reported in the federal budget. Yeah... kinda like Enron if you were wondering.
The reason we are in this mess is that the money young workers are currently paying into the system is not being saved. It is immediately getting paid out to current retirees. Any excess tax revenues are put into government bonds. Unfortunately when the government buys a bond from itself there is no real savings going on. It is for this reason that you will hear that the Social Security Trust Fund is full of IOUs that the government has written to itself.
If a private business were to set up such an operation it would be called a ponzi scheme and the CEO would end up in jail. Politicians, for some reason, don't want to hold themselves up to the same standard. Go figure.
President Clinton laid out the available options years back when he said we had to make a choice. I'll paraphrase but in essence he said we can raise taxes, cut benefits, or allow younger workers to invest a portion of their taxes in private accounts. The final option allows these younger workers to rely upon their own savings when it comes time to retire, not on the future tax payments of their children.
What is Kerry’s response to this looming disaster? He’s stated he won’t raise taxes, he won’t cut benefits, nor will he privatize in any way the current system. What that means is he’ll leave the system as is for someone else to deal with. During the next four years trillions more of unfunded liabilities will be run up by the government, making it all the more difficult to solve the problem in the long run.
Bush to his credit has addressed this third rail of American politics and has promised to tackle it in his second term. A current bill sitting in Congress would allow workers to invest 10 percentage points of their payroll taxes, applying to the first $10,000 of income, in a private account. Thereafter the rate would drop to 5 percentage points. What that would mean is that even someone making as little as $10,000 a year would now have $1000 in a 401K type account every year. It is my belief that once this would be in place it would change the landscape of American politics permanently.
Can you imagine if Kerry was campaigning on the premise that people shouldn’t be allowed to invest in their own 401Ks, and that the government should own these accounts so people don’t gamble their savings away on the stock market? Additionally the money currently in 401ks would be liquidated and paid out to today’s senior citizens, many of whom are in fact very wealthy. This election would have been over before it started. Now imagine that if every worker today, instead of seeing hundreds of dollars taken out of their pay checks for FICA, instead saw this money being placed in their own private account. As I said there would be no turning back.
For some more reading see here.
Trade & Outsourcing: Kerry had a strong free trade voting record until he started running for Senate. Now he betrayed this record in order to shore up union support. Yes, there is a good chance that, like Clinton, Kerry for the most part would promote free trade and help us down the road to a more integrated global economy. Still it’s hard to support a candidate that runs a campaign based on the fact that Americans have some sort of rights that the rest of the world’s citizens do not.
For more see here.
Jobs, the Economy, & Taxes: The real benefit of Bush's tax cuts was the leveling off of the playing field in term of how corporations distribute their earnings. Many have written this off as a tax cut for the rich but it clearly benefits the economy to have companies making decisions on a basis of what’s best for business, not what’s best for tax purposes.
Here are two charts that show some of the effects. The first chart is a graph of annualized GDP growth. I’ve included the last two quarters of the Clinton Administration just to point out that the first quarter of negative growth did not come on Bush’s watch. The columns turn red after his tax cuts were fully implemented. As you will notice we’ve had 6 consecutive quarters of strong growth since that date.
It’s also good to put the jobs debate in perspective. Here’s a graph of the unemployment rate over the last few decades. As can clearly be seen, this has been a relatively shallow recession.
For more reading on the subject I suggest this piece by Edward Prescott, co-recipient of the 2004 Nobel Prize in Economics.
Healthcare: Often when politicians talk about controlling healthcare costs what they are actually talking about is controlling healthcare prices. They can do this through price controls (importing price controlled drugs from Canada) or by picking up the tab themselves (ala Kerry’s healthcare proposal). To control actual costs you have to either increase supply or decrease demand, it’s that simple.
Bush’s Health Savings Accounts (HSAs) get insurance covering what it is supposed to be covering: unexpected and rare events. Insurance isn’t supposed to cover routine medical expenditures but due to bizarre tax laws that is exactly what it has become. Bush’s HSA accounts allow individuals to set up tax free accounts for common medical expenditures (antibiotics for the example) while leaving insurance to cover rare and expensive items.
This has two main benefits. First, it gets patients asking the all important questions: “how much is this going to cost?” (For example if a doctor charges you $150 for a routine visit but your insurance covers the entire cost, it doesn’t affect you one way or the other. However, if you are paying for the doctor out of your own private account, you are most likely are going shop around to get more bang for your buck.). Two, it makes your healthcare insurance portable. Just as 401Ks have made company pension plans less attractive and have given employees the freedom to change employers without losing retirement benefits, HSAs will have the same effect. People often fear leaving a job as they lose their company provided health insurance, but employees own an HSA themselves and it will move with them from career to career. These are two big improvements over the current system.
Kerry’s plan involves a huge government expenditure which does nothing to change incentives.
A more detailed analysis can be found here.
Education: Kerry once had some pretty radical ideas for education which I support. But running for president you can’t be for school choice and expect to be endorsed by the NEA. As president, he most likely would veto this bill which was supported by fellow Senate Democrat Diane Feinstein. No candidate that puts politics over principles when it comes to educating children would ever get my vote.
Immigration: Kerry is in favor of an amnesty which I support. For those who feel that this would be rewarding those who broke our countries laws I'll refer you here. Unfortunately, I don't think that Kerry could get this through a Republican Congress and in four years we'll be in the exact same position we are in now. Bush has the political capital to get his immigration package though the Congress and, while not perfect, I believe it's a good plan.
That all said, it is always tough choosing between the lesser of two evils.
On election day 1996 I sat in my apartment living room in the late afternoon waiting to see who would get my vote for president. Republicans Bob Dole & Jack Kemp had perked my interest with a plan to cut capital gains taxes in half, which I saw as a way to unlock a tremendous amount of capital that was currently not being transacted due to the high rate of taxation. President Clinton had ridiculed this plan as a tax cut for the rich. I was a junior in college and it was my first time voting in a presidential election. If it was a close race I planned on casting my vote for the Republicans. When the news announced that Florida had gone to Clinton I walked out the door and across the street to the polling place and voted for the Libertarian candidate Harry Browne.
A little over a year later, contrary to his campaign rhetoric, Clinton himself slashed taxes on capital gains to 20% helping to put a bull market in motion. During that term he also helped in reforming welfare, eliminated taxes on the first half-million dollars of capital gains of residential real-estate, and put together a task force to begin the privatization of social security. It is rumored that he felt privatizing social security would be his legacy that would be remembered for generations to come. Unfortunately, a fling with a certain intern named Monica threw a monkey wrench in those plans as Clinton had to return to his base to fight off impeachment.
Could Kerry be saying one thing now just to get elected, while he would be pleasantly surprising me in just a few short years? Possible... but from watching this campaign I'd have to say it is doubtful. The best thing that's going to come out of a Kerry Administration is gridlock, which truthfully might be better than the alternative.
And what if on Wednesday morning we find out that Senator Kerry will become President Kerry this coming January? If this is to come to pass, I ask of my friends who will be rejoicing in his victory just one request: do not turn on your principles for the sake of party loyalty. Over the last four years I've had intriguing discussions with various friends criticizing Bush for his wreckless spending, the pork laden farm bill, steel tariffs, a bloated Medicare giveaway, the Patriot Act, and of course for the war in Iraq.
However once the Democratic primaries started the mood changed. All of a sudden free trade wasn't quite as appealing, outsourcing suddenly became ever so worrisome, and while Bush's Medicare reform was still awful... what could be so bad about nationalizing healthcare?
In a way it reminded me of coming back to the States after nearly a year in Spain. During the months preceding my departure the U.S. was bombing the Balkans like there was no tomorrow. There was news footage of the destroyed Chinese embassy and Gen. Wesley Clark was caught defending the bombing of a passenger train using military footage that was played at three times the normal speed. My European classmates and co-workers were outraged. Once I returned to the U.S. however, nobody really seemed to care except for a few lefty wackos (but who listens to them). If a Democrat starts a war it must be a good one... right?
If politicians know that the party loyalists will ignore principles just to keep their guy in office, they certainly will take advantage of it. Republicans may have lost this election by trying to keep a smile on their face while being stabbed in the back on issues such as free trade and spending restraint.
If Kerry is victorious I hope his supporters will learn this lesson quickly. I don’t know if I can handle four years of a partisan defense of his administration.
The Day After Tomorrow
This Wednesday, with any luck, we should know who will be occupying the White House for the next four years. Unfortunately, my internet connection went out last night so I'm a little late getting up a post on tomorrow's presidential election. Look for it later on this evening.
In the meantime the Cato Institute has posted a piece by Doug Bandow in favor of John Kerry, and another by Dan Griswold which makes the case for Bush. Both are worth a read.
"The deficit can be cut in half if Congress "is willing to make tough choices," says President Bush. But GOP legislators are likely to make tough choices only if he is replaced by a Democrat. History teaches us that divided government equals fiscal probity, so vote Democratic for President if you want responsible budgeting in Washington."
"Meanwhile, Kerry and his party have proposed huge increases of their own in federal spending. Their chief criticism of Bush on health care, education and just about everything else but defense is that he has not been spending enough. And they want to underwrite their own spending spree with higher taxes on, you guessed it, "the rich." Kerry and much of his Democratic base want to slow the advancement of free trade and accelerate regulation of the economy. They criticize Bush for his conduct of the war in Iraq but do not challenge it on principle."