tag:blogger.com,1999:blog-230624202024-03-13T03:04:02.981-07:00The FoldvariumFred Foldvary teaches economics at Santa Clara University.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.comBlogger96125tag:blogger.com,1999:blog-23062420.post-73703711040690954062014-05-05T17:03:00.001-07:002014-05-05T17:03:59.581-07:00Ron Paul videoI recommend “Liberty Defined: The Future of Freedom” by Ron Paul.<br />
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http://www.independent.org/multimedia/detail.asp?m=2530<br />
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Recorded: Wednesday, April 9, 2014<br />
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As stated by the Independent Institute, "Ron Paul, the former 12-term Congressman and Presidential candidate, takes a candid look at America’s increasingly dysfunctional political system. Drawing on his 24 years in Congress, he highlights the need to rein in unchecked government power. The author of numerous #1 New York Times bestselling books, Dr. Paul is a leading advocate for individual liberty, privacy, limited constitutional government, low taxes and spending, free markets, restrained foreign policy, and sound money."<br />
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The presentation is introduced by Steve Shmanske, director of the Smith Center for Private Enterprise Institute at Cal State U East Bay, co-sponsored by the Independent Institute at Oakland, California. David Theroux, president of the Independent Institute, introduces Ron Paul.<br />
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Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com1tag:blogger.com,1999:blog-23062420.post-41823477062774733482013-12-30T08:09:00.001-08:002013-12-30T08:09:09.178-08:00California's Decentralized Voting ProposalIn California, the voters are able to put proposed laws on the ballot if they gather enough signatures. This process is called an “initiative”. The legislature may also place propositions on the ballot, a process called a “referendum”.<br />
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One of the ballot propositions for 2014 is “The Neighborhood Legislature Reform Act”, which would decentralize the election of representatives in order to reduce the political power of special interests such as corporations, labor unions, and trial lawyers. This reform would shift political power to the people of California. (For the text of the initiative, see http://neighborhoodlegislature.com/legislature/).<br />
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Like the US Congress, the California legislature has two houses, a Senate with 40 members and an Assembly with 80 members. The population of California is 38 million. The districts for the California Senate now have 950,000 persons, a greater number than for Congressional districts, while about 475,000 people live in each assembly district. It now takes a million dollars to win a California Senate seat. <br />
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The Neighborhood initiative would instead create Senate districts of 10,000 persons and Assembly districts of 5000. These neighborhood districts would form a greater association of 100 neighborhood districts within the current districts. The association council would elect a representative to the state legislature, thus keeping the same number of representatives in the state legislature. However, the final approval of a law would require a vote by all the neighborhood district representatives. That vote could be done on an Internet web site, as corporations now do for their elections of board members and propositions.<br />
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The Neighborhood Legislature proposition was initiated by John H. Cox, who has been a lawyer, real-estate management executive, and local office holder. The aim is to have the measure on the November 2014 ballot. That will require over 800,000 valid signatures, 8 percent of the votes cast for governor in the last election, by May 19. That is a high hurtle, which usually requires several million dollars to pay for signature gatherers. This initiative has already made a splash, with articles in the <i>Wall Street Journal</i>, <i>Washington Post</i>, <i>The Los Angeles Times</i>, and other media.<br />
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I have been writing for years on reforming democracy with tiny voting districts in a bottom-up structure. Back in 2007, I wrote an article, “Democracy Needs Reforming” (http://www.progress.org/tpr/democracy-democratic-reform-2/), proposing that the political body be divided into cells of 1000 persons, each with a neighborhood council. A group of these would then elect a broader-area council, and so on up to the national congress or parliament. The state legislature would then only need one house, rather than a bicameral legislature that mimics the US Congress and British parliament. This “cellular democracy” would eliminate the inherent demand for campaign funds of mass democracy.<br />
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The Neighborhood Legislature Reform Act would not be quite as thorough a reform as a cellular democracy based on tiny districts, but it has the same basic concepts: smaller voting groups, and bottom-up multi-level representation. This initiative would indeed greatly reduce the demand for campaign funds that are needed in today’s huge California electoral districts.<br />
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It will be a great challenge to obtain the needed signatures. It could happen if the media provide editorial support and coverage. At any rate, the fact that this initiative is taking place will go a long ways to publicizing the gross corruption of democracy that is taking place, and the only effective remedy to the inherent dysfunction of mass democracy. Many reforms are needed in today’s governments, reforms in taxation, pensions, environmental protection, transit, criminal law, and economic deprivation. The main reason that useful reforms are not taking place is the subsidy-seeking and reform-blocking induced by mass democracy. The initiative process in California and other states is a way to circumvent the corrupt legislature, but in a large state like California, that process itself requires big money. <br />
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It will be interesting to watch the progress of the Neighborhood Legislature initiative, and to watch the special interests jump in with misleading negative ads. If this goes on the ballot and wins, it will be a victory for the people and a defeat for the moneyed special interests. <br />
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(This article first appeared in www.progress.org).Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com1tag:blogger.com,1999:blog-23062420.post-13673575179464925532013-10-22T07:03:00.000-07:002013-10-22T07:03:13.472-07:00Criminalizing InnovationThe U.S. government has attacked an entrepreneur and his new product, as another episode of the federal government’s war on enterprise. In this case, the entrepreneur CEO is Craig Zucker, the company was Maxfield & Oberton, and the product was Buckyballs.<br />
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Buckyballs were small magnetic spheres made of neodymium, a rare-earth element that is a powerful magnet. As they stick together, the balls can be assembled into shapes such as pyramids. They were named “Buckyballs” after Buckminster Fuller, an American architect, inventor of the geodesic dome, and futurist visionary. His friends called him “Bucky,” and the neodymium spheres were somewhat like Bucky’s domes. <br />
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The company imported the balls from China and started selling them in 2009. They became a popular office toy. But the Buckyballs were banned in July 2012 by the federal Consumer Product Safety Commission, which is now seeking to prosecute Zucker for having sold the balls.<br />
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In 2012 the Commission also sent letter to retailers warning of the risks to consumers of using Buckyballs and asking them to stop selling them. That was effective in stopping the sales. The Commission stated that the balls were a hazard for young children who swallowed them.<br />
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The company had developed the Buckyballs in collaboration with the Consumer Product Safety Commission, and after the action by the Commission, the firm provided it with a corrective-action plan. Buckyballs were sold with a warning against access by children, and they were not sold in toy stores. But the Commission pursued a lawsuit against the firm even before examining the corrective plan. As pointed out by the Wall Street Journal article (cited below) on that case, there are many potentially dangerous products being sold, such as cleaning chemicals, knives, and balloons. Buckyballs were intended and marketed for adults, and, according to the WSJ article, no deaths have been associated with the Buckyballs.<br />
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The Commission declared, as a justification for the ban, that Buckyballs have “low utility” and are unnecessary, despite purchases by 2.5 million adults who spent $30 each. The principle established by the Commission is that government determines which products are desirable, not consumers. Any product could be banned by the standards of the Commission.<br />
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The company then engaged in a publicity campaign regarding the actions by the Commission. In the end, the government was too powerful to resist, and the company was terminated in December 2012. However, in February 2013, the Commission charged Zucker as being personally liable for the costs of a recall costing $57 million if the Buckyballs are judged to be defective.<br />
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The federal government has by this action abolished limited personal liability under U.S. law for corporations as well as partnerships. From now on, the executives of a firm will be vulnerable for the liabilities of the firms. Any entrepreneur will now risk losing all that he owns if he engages in the production or distribution of any product. The effect of this government action is to strangle American entrepreneurship.<br />
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In the case of United States v. Park in 1975, the Supreme Court ruled that the CEO of a food company was criminally liable for a rodent infestation. This ruling was based on the federal Food and Drug Act. But another case, Meyer v. Holley in 2003 ruled that ordinary liability applies unless there is a clear Congressional intent to hold corporate officers personally liable. The relevant law in the Buckyballs case is Section 15 of the Consumer Product Safety Act, which regulates corporate persons, not individual persons.<br />
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The WSJ article says that since Zucker did not commit any criminal violation, the Commission’s continuing prosecution of Zucker “raises the question of retaliation for his public campaign against the commission.” If the Commission achieves its goal, personal-injury lawyers will take advantage of personal liability to go after CEOs and other company personae. <br />
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This action by Congress, the Courts, and the Commission has to be seen in the perspective of a broad war by government on private enterprise and consumer choice, using taxes, restrictions, mandates, and prosecutions, ultimately resulting in an economy that is nominally private but substantially controlled by governmental chiefs. The name for that system is “fascism.”<br />
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Reference: Sohrab Ahmari, “What Happens When a Man Takes on the Feds,” <i> Wall Street Journal, </i> August 31-September 1, 2013, p. A11.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-11954756547112723072013-10-19T07:54:00.004-07:002013-10-19T07:54:31.416-07:00FATCA closes Americans’ Foreign Bank AccountsWhen the USA adopted the 16th Amendment to the Constitution a century ago, did the people understand that this would deprive Americans world-wide of foreign banking services? Americans thought that the income tax would just grab the money from the rich, but they did not understand that the income tax would tax everybody else more. All that is needed to equalize wealth without damage to the economy is to stop government subsidies, but this requires an economic sophistication that so far has eluded most people.<br />
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Inherently, an income tax yields an incentive to cheat, as the government depends on reporting. So the Internal Revenue Service has to monitor financial accounts to prevent tax evasion. Gradually, the IRS has extended its reach into accounts, first within the USA, and now into the foreign accounts held by American citizens.<br />
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No other country has imposed such costs and mandates on foreign accounts as the USA. So ironically the “land of the free” has the least economic freedom for its citizens abroad. The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 requires foreign financial institutions to make reports on American accounts. Foreign financial institutions with American customers are required obtain a Global Intermediary Identification Number. FATCA requires foreign financial firms to identify their U.S. account holders, to disclose the account holders' names, social security or other tax IDs, addresses, and the accounts' balances, receipts, and withdrawals. For some accounts, the foreign bank is required to withhold some of the interest paid to the account, and send it straight to the IRS. This US law overrides the privacy laws of the foreign countries.<br />
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US law is thus legislating not only within US territory but throughout the whole world. If a financial firm does not comply, the IRS will tax 30 percent of its US-sourced income. The IRS is also busy laying out the legal infrastructure for enforcing this law with agreements with foreign governments for data sharing. Governments world-wide are signing on, because they too face the problem of tax evasion when they tax income that can hide.<br />
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FATCA does not just affect fat cats. Many foreign banks are now refusing to provide Americans with bank accounts and are closing the accounts of Americans, who are now also unable to obtain mortgages and insurance abroad. Americans are increasingly giving up their US citizenship in order to be able to work or retire abroad. <br />
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The US economy depends on international trade and global finance, with many Americans working abroad for US and foreign firms. Six million Americans live outside the territory of the USA. If Americans can no longer have foreign bank accounts, because the costs to the banks are too high, they will be so hampered that fewer Americans will be willing to live abroad, and this will hurt American enterprise.<br />
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Since the US government cannot directly impose laws on foreign lands, many foreign firms will sell their US affiliates and stop holding assets within the USA, thus putting themselves beyond the control of the US government. The overall cost to the US economy of FATCA may be much greater than the increase in tax revenue from reduced tax evasion. Also, those who seek to evade income taxes will find other ways. High taxes induce tax evasion, and enforcement drives evasion into other channels. How successful are US drug laws in stopping the smuggling in of drugs, and how successful have US immigration restrictions been at preventing illegal immigration?<br />
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Another consequence of greater reporting of American accounts is the increased risk of identity theft and theft of money from accounts. The greater the reporting, the greater the revelation of data that can be stolen.<br />
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It is no use seeking to repeal FATCA. The regulation of accounts, no matter how costly, follows from the income tax being, as Henry George put it, a tax on honesty. The taxation of wealth that can hide and flee requires strict and costly reporting and enforcement. The only effective remedy is to tax something that will not flee, hide, or shrink when taxed. A tax on land value cannot be evaded, and if that were the only tax, there would be no need to impose costs on finances.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com1tag:blogger.com,1999:blog-23062420.post-5078463153580067272013-10-14T08:40:00.001-07:002013-10-14T08:40:22.623-07:00Inequality UnexplainedInequality Unexplained<br />
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by Fred Foldvary, Senior Editor, 14 October 2013<br />
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There is a new economics documentary film that stars Robert Reich, former Secretary of Labor under President Clinton and now a professor at the Goldman School of Public Policy at the University of California at Berkeley. The film, <i>Inequality for All</i>, directed by Jacob Kornbluth, won a U.S. Documentary Special Jury Award and has been shown nation-wide. <br />
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Unfortunately, Robert Reich has not explained why the US has had an increasing inequality of income. Neither in the film nor in his writings and interviews does he examine the cause. Without the elimination of the cause, there can be no remedy. As usual in documentaries of social problems, most of the film just describes and tells stories about the inequality. <br />
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<i>Inequality for All</i> is typical of welfare-state presentations in jumping to governmental responses that only treat the symptoms and effects. Reich advocates a higher minimum wage without any analysis what determines wages in a market economy. <br />
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Most basically, in a free market, ordinary workers are paid what economists call the “marginal product,” or what an extra worker contributes to output. If a worker adds $10 each hour to total output, then that is what he is paid, and that is what he is worth to the company. If the company pays him any less, say $8, that provides an opportunity for a similar company to offer $9 and get the $10 worth of output, so competition will drive the wage up to the worker’s contribution, his marginal product.<br />
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A minimum wage forces the firm to pay more than the worker’s marginal product. The firm will not hire a worker who costs more than he is worth. The reason that workers are not all dismissed is the law of diminishing returns. In a farm or factory, if there are only a few workers, each worker’s marginal product is high, because there is a lot of land and machines, and few workers. As workers are added, each extra worker contributes less extra output. Workers are hired up to the quantity for which the wage equals the marginal product.<br />
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The minimum wage acts like a tax on labor that forces the firm to reduce the number of workers employed to that level where the higher marginal product equals the required wage. In some cases, the firm will also respond by reducing benefits such as medical insurance such as by hiring part-time instead of full-time labor.<br />
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Many firms in competitive industries respond to the higher minimum wage as they would to a higher tax. They pass on some of the costs to the customers. The higher price reduces sales, production, employment, and income. <br />
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The minimum wage is lethal to the economy as it acts as an extra tax on employment on top of payroll taxes, unemployment taxes, workers insurance taxes, and the income tax on the profits of the firm. All these taxes reduce employment and reduce the take-home pay of the worker.<br />
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Henry George stated in his 1883 book <i>Social Problems</i> that “There is in nature no reason for poverty.” Poverty is caused not by any lack of natural resources but by human institutions that deprive workers of the ability to buy what they produce. The institution with the power to impose this intervention is government. The totality of restrictions, mandates, taxes, and subsidies reduces enterprise and takes away much of the product of labor. Then impoverished workers need the welfare state to provide the necessities of life. <br />
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The ideology of welfare statists makes them only think of governmental aid and reject the idea that governmental intervention is the source of the problem. They sneer at “free market fundamentalism.” They don’t understand the fact that taxes on labor redistribute wealth from workers to landowners as government taxes wages to pay for public goods that generate higher rent and land value. They don’t understand that the worker-tenant pays twice for the public goods of government, once by having half his wage taxed away, and a second time in the higher housing rental he pays because greater governmental services increase locational rents.<br />
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The effective remedy for poverty is to remove all punitive taxes and land-value subsidies. We can remove subsidies to the landed interests by having them pay back the rent generated by useful public goods such as roads, schools, and security. Without taxes on labor and enterprise, the cost of labor is lower to employers, while the worker’s take-home pay is higher. The replacement of wage taxes with land value taxes would reduce economic inequality while also increasing the productivity of the economy.<br />
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Of course the elimination of poverty also has to include better education, and that can be accomplished with vouchers, payments not to schools but to parents. A voucher is a ticket that a parent could use to send his children to the best schools. It provides an incentive for educators to produce better schools. It is not a panacea, because the home and neighborhood environment are also important, but it would shift the incentives towards better schooling.<br />
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It is not only unfortunate but astonishing that a leading professor of public policy who cares about the poor would not make the prosperity tax shift, replacing wage taxes with land value taxes, the core of his policy proposal. I suspect his response would be that while this is a good idea, it is politically unfeasible, while raising the minimum wage has political support. But the reason it is politically unfeasible today is precisely that leading reformers such as Robert Reich refuse to bring the effective remedy to public attention in the ultimately futile effort to advocate policies with the least current political resistance. <br />
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Much of the gains from economic growth and welfare get captured by higher rent and land value. Raising the minimum wage is futile because if all workers get a substantially higher minimum wage, their landlords will be able to raise their housing rentals by the amount of their greater ability to pay, and the landed interests will end up with the gains. Why do you think that housing costs have been escalating while wages stagnate? Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-72999088541403380032013-07-21T08:50:00.000-07:002013-07-21T08:50:07.828-07:00My favorite economic thingsFree grocery samples and<br />
discounts for teachers.<br />
No fees for checking and no charge for credit.<br />
Nobody asks for ID for my beer.<br />
Those are just some of my favorite economic things.<br />
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No tax on wages nor taxes on goodies.<br />
No tax on buildings nor taxes on business.<br />
No tax on anything ‘cept for the land.<br />
Those would be some of my favorite things.<br />
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No crimes for acts that are without victims.<br />
No laws restricting my speaking and writing.<br />
Nobody tells me what I have to do.<br />
That would be some of my favorite things.<br />
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When the tax bites.<br />
When police sting.<br />
When I’m feeling oppressed.<br />
That’s when I remember my favorite things.<br />
So why do I still feel bad?<br />
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Peace in the world, even for Jews.<br />
Peace and justice for Arabs as well.<br />
Muslims and Christians no longer at war.<br />
Those would be some of my favorite things.<br />
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Animals treated humanely and kindly.<br />
No more pollution or else compensation.<br />
Tolls make congestion a thing of the past.<br />
Those are my favorite wishes for sings.<br />
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Someone to love, and someone to be with.<br />
A cat, dog, or rabbit that we can have fun with.<br />
Friends and the relatives that we enjoy.<br />
Those are the best of my favorite things.<br />
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When disease strikes.<br />
When my hives itch.<br />
When I get the flu.<br />
That’s when I remember my favorite things.<br />
I wish they could all come true.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-10238955454775369482013-05-27T05:59:00.001-07:002013-05-27T05:59:03.524-07:00Income Taxes are Inherently CorruptingThere is no way to have an honest income tax. As Henry George wrote, the income tax is a tax on honesty. Cheaters gain while honest people lose because they have to pay a higher tax to make up for the nonpayment by cheaters.<br />
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The taxing agency must have the power to intrude into people’s finances to check the taxpayer’s honesty and his competence to report all gains. One should not blame the IRS when it listens to telephone calls, reads email messages, checks social media postings, looks at mail envelopes, and audits records, because it is its job to check for cheating.<br />
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It is too costly to check all taxpayers and non-payers, so the tax-man has to be selective. The need to discriminate - to investigate one group rather than another - tempts the authorities to exploit their power to favor their friends and punish their enemies.<br />
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A value-added or sales tax is also corruptive. To enforce a high sales tax, the authorities need to check the records, and receipts of the sellers, and they also need to invade the privacy of buyers to make sure they have, for all their goods, receipts that disclose the taxes paid.<br />
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Any tax based on transactions, whether obtaining income or selling goods, requires an invasion into the privacy of both buyer and seller, including the income payer and the income earner, because the tax tempts both parties to evade the tax.<br />
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When income is taxed, the government recognizes that some income consists of transfers rather than payments for services. Therefore there are also taxes on gifts and inheritances. But some transfers are intended to finance activities of social rather than individual benefit, so to promote such activities, the funds received by charities are not subject to income tax. The exemption from income taxation is another temptation to cheat, and therefore government has to impose disclosures, and that then also inevitably tempts the authorities to exploit their power.<br />
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It should be no surprise that sometimes the exploitation by the governmental authorities will be so stark that it becomes a scandal. The targeting of conservative groups by the Internal Revenue Service is just the most recent example. The chiefs then have to deny responsibility and refuse to answer questions. The official who initiated the biased screening has not be identified. The response of the tax agency is always to claim that they have not been given enough funds for better enforcement.<br />
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To exert power, the taxing agency has to call on other government agencies to bring an army of intruders into the targeted persons. A woman in Texas who founded two public policy groups and sent in applications for tax-exempt status became a target of the FBI; the Bureau of Alcohol, Tobacco, and Firearms; and the Occupational Safety and Health Administration, as well as the IRS. This serves as an example to others that IRS can invoke the full might of the US government <br />
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IRS officials say they need to engage this power to do their jobs, which is true. The top officials cannot know all that the underlings are doing. And it would fight human nature to require agents to avoid acting on their biases. The firing of one or two officials will not stop the practice because the structure of the tax system inflicts unstoppable perverse incentives.<br />
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Economics tells us that to change outcomes, we must change the incentives. A tax system that minimizes corruption requires that the tax base be based on implicit reality rather than explicit transactions. Adam Smith in the <i> Wealth of Nations </i> recognized that the implicit reality that is best suited for public revenue is ground rent.<br />
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We minimize tax corruption by fully disclosing all tax records. A tax on land rent or land value is based on property prices that are a public record. Today, in the USA, property assessments can be, and often are, available on the web sites of county governments. In a properly-applied land value tax, one can look up any property address and find the assessed value. <br />
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Also in a proper land value tax, all land is subject to the tax payment, including land held by nonprofit organizations, including governments. There should be no exceptions. Besides disclosure and universal tax payments, the third element that minimizes bias is the ability to appeal an assessment. If a property owner thinks his property was assessed too high, relative to his neighbors, he can bring the case to an appeal board, and then to a jury.<br />
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Land is inherently public. It cannot hide or flee when taxed. One’s wage or business profit or income from savings is inherently private, and should not have to be publicly disclosed. Also the capital goods of your home - the wiring, the plumbing, the paint, the attached appliances, and the quality of the walls, floors, and ceilings, are subject to inspection with a tax on buildings, but irrelevant if only the ground is taxed.<br />
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Only a land-value tax has complete privacy for one’s personal finances and complete disclosure of the tax base. We cannot claim that a land value tax is 100 percent free of corruption, because any human institution is imperfect, but utopia is not an option. We can only select the tax base that minimizes evasion, cheating, corruption, and intrusion, and that is land.<br />
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The land value tax is based on implicit reality rather than the superficial appearance of transactions. The tax on ground rent or land value is implicit because it is based on the economic rent of land, the highest rent it will fetch, rather than any explicit payment by tenants to landlords. Therefore land value taxation conforms to what economic theory tells us is the best source of public revenue - best for the economy, best for honesty, and best for avoiding tax scandals.<br />
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Those who decry the abuse of power by taxing agencies are themselves guilty of helping to cause the problem unless they take their case to its logical conclusion - the replacement of taxes on earned income and produced goods with a tax on land value. Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-38554555274507412322013-04-14T11:18:00.004-07:002013-04-14T11:18:41.918-07:00Moral Markets and Immoral “Capitalism”The question, “Is capitalism moral?” was raised by Steven Pearlstein in a 15 March 2013 article in the <i> Washington Post.</i> He is a professor of public and international affairs at George Mason University and a column writer for the <i> Washington Post.</i><br />
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Pearlstein writes that we in the US are engaged in a “historic debate over free-market capitalism.” Maybe so, but “free-market capitalism” is a contradiction in terms. There are two reasons why the economic system is called “capital”ism rather than “laborism” or “landism.” First is that capital dominates labor. The second reason to call the system “capitalism” is to hide the role of land, so that people focus only on the conflict between workers and capitalists. The chiefs of finance and real estate are able to dominate because of their political clout. They obtain privileges from government in subsidies, limits on competition, and periodic bail outs. In contrast, in a free market, there is no domination, with neither subsidies nor imposed costs. <br />
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Pearlstein then says that if “markets” were providing prosperity for most folks, there would be no need for governmental intervention. But we don’t have pure markets. We have a mixed economy, with intervention into markets, so one has to first analyze whether it is markets or else interventions that cause high inequality, instability, poverty, and unemployment. Since pure markets are not given an opportunity to work, how can they be responsible for economic woes?<br />
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He then asserts that for the past 30 years, the world has been moving towards a greater role for markets. That is so for China and the countries previously dominated by the USSR, and these economies have indeed experienced greater growth and prosperity. <br />
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But, contrary to Pearlstein’s assertion, the US has been moving away from a market economy. Frequent governmental crises - the fiscal cliff, budget deadlines, ever changing tax rates - threaten the stability of financial, industrial, and labor markets. The subsidies to real estate and its financial allies have never been greater. The domination of the Federal Reserve over money, banking, and interest rates has reached historic heights. The tax reforms of the 1980s have been reversed by Congress, which has made income taxes ever more complex. Costly regulations continue to pour out of Washington DC by the thousands each year. And now the government will dominate medical provision like never before.<br />
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The decline in the role of markets can be measured by an index of economic freedom. According to the Fraser index of economic freedom (freetheworld.com), U.S. market freedom peaked out in the year 2000 at a rating of 8.5 out of 10, and then declined to 7.69 in 2010 as intervention grew. The US freedom ranking among countries dropped from third place in 2000 to 18th out of 144 in 2010, and most probably has continued sinking since then.<br />
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Critics of markets have asserted that stagnant household incomes and financial crises are the fault of a greater role for markets, when in fact, in the US and Europe, massive subsidies to real estate caused the recession, excessive government borrowing has caused the fiscal crises, and a governmental redistribution of wealth from workers to landowners has stagnated net wages.<br />
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I agree with Pearlstein that we should welcome the debate on economic morality. But we should use words that have real economic meaning, rather than propaganda terms. Any person who refers to “capitalism” other than with critical quotation marks contributes to the confusion. The critics of markets opportunistically use the term “free market” to refer to the mixed economy, and then use the term “capitalism” also for the concept of a pure free market. Hence they argue that “capitalism,” as the mixed economy, suffers from economic woes, and then jump to the false conclusion that “capitalism,” meaning the pure market, causes the problems.<br />
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A real debate should also unmask the role of land that hides under the label “capital”ism. Critics who speak of the “market’s” unequal distributions overlook the massive redistribution of income from workers to landowners, as taxes on wages pay for public goods that pump up rent and land values. Their call for higher taxes on the rich disregards the distinction between earned income from entrepreneurship and unearned income from governmental subsidies.<br />
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Pearlstein admits that “many of the arguments have been a bit flabby, with both sides taking refuge in easy moralizing.” That is true. An honest and robust debate should avoid the deceitful switching of meanings for “capitalism”, and indeed avoids using the flabby term altogether. Instead, use the clear and honest words “pure market,” “intervention,” and “mixed economy.” If we say that the mixed economy has economic woes, one cannot then conclude that the pure market has caused them, because the mix also includes intervention. Clear thinking about economic morality cannot begin until we have clear terms that reflect the full-spectrum of economic reality.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com1tag:blogger.com,1999:blog-23062420.post-43918072370949680782013-03-31T12:45:00.001-07:002013-03-31T12:45:27.479-07:00Disclosure: a Weak Underbelly of the Interventionist EconomyMy friend Marc Joffe, a financial analyst and expert on public sector credit rating, says that there are four fields in which “capitalism” has a “weak underbelly.” These are appraisal, auditing, equity research, and credit ratings.<br />
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I have a semantic quibble about the term “capitalism,” as it seems here to be applied as a label for the current economies of the world, but the implication is also that the term applies to a pure market economy. The relevant economic issue is whether these really are four free-market horses of financial trouble if not apocalypse. <br />
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As stated by Joffe in his <i> Progress Report </i> article, “The Weak Underbelly of Capitalism” (progress.org/2013/evaluati.htm), these four fields of financial analysis “inform investors about the value and risk” of assets. When people buy property based on incorrect valuations, these can become bad investments and speculations that, if systemic, can either contribute to asset bubbles or else hamper growth. Austrian-school economists call these “malinvestments” and “malspeculations.”<br />
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Indeed, there is plenty of evidence that financial-analytic services have been faulty. There were bad analyses of firms such as Enron, the 1990s Internet firms, and the credit ratings of mortgage derivatives during the real estate boom that crashed in 2008.<br />
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Joffe says that the analysts can be “bullied or bribed” by the chiefs of their firms or by clients “to distort their findings.” Some analysis can go awry from using biased assumptions that turn out to be incorrect, but misconduct could also be deliberate fraud that enables sellers to steal from misled buyers. A morally proper contract must encompass parties who are truthfully informed.<br />
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In a pure free market economy, all transactions are voluntary. Theft, including fraud, are violations of property rights. Fraud is outside the market, and the free market included the protection of property rights, hence the prohibition and punishment of fraud.<br />
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What is deficient is therefore not the market, but the law and its enforcement. The failure to prevent such deliberately misleading financial data is a government failure. To say that it is a problem of “capitalism” is confusing, because “capitalism” could refer to today’s mixed economies, markets distorted by intervening restrictions, taxes, and subsidies.<br />
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However, as Marc Joffe states, the governmental regulation of financial analysis is inherently deficient. It would be too costly for regulators to oversee every appraisal, audit, valuation, and credit rating. Moreover, a regulatory agency would also be vulnerable to capture by the financial industry, i.e. the members of the agency would come from the financial fields and could be bribed by special favors that are on the edge of legality. It could be difficult to distinguish between an honest mistake and a deliberate failure to correct dishonest data. We have witnessed Ponzi schemes such as the Madoff scandal that the SEC (Securities and Exchange Commission) failed to prevent or stop.<br />
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Joffe offers a solution in greater disclosure. When information is made public, more people can review the data and catch errors. Peer review can also promote the best methods of analysis, such as with open-source projects. Joffe’s solution is therefore a four-horse open carriage, making the analyses of appraisal, auditing, equity research, and credit ratings available to the public. To help achieve that goal for ratings, Joffe has developed an “open source government bond rating model.”<br />
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The economic question is then whether the governmental requirement of disclosure for financial analysis used in transactions is an intervention into the market, or else whether such disclosure is market-enhancing and therefore not an intervention but actually part of the market as a protection of property rights. In ethical terms, is there coercive harm to others when there is no disclosure?<br />
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As stated by Joffe, financial firms enhance their profits “by keeping information to themselves.” Therefore a mandatory full-monty disclosure reduces their economic profit, i.e. profit beyond normal returns to labor and asset values. Firms can charge more for evaluations and ratings when the information is not available to others.<br />
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On a pure cost-benefit basis, disclosure would surely have a much greater economic benefit than the cost of lost profits. But free-market policy analysis must be based on the ethic of the market, not merely on cost-benefit, since a pure utilitarian view would trample on enslaved minorities if there were greater total benefits to the majority.<br />
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The free-market answer is meta-disclosure at the highest level of choice. A meta-disclosure is disclosure about disclosure. For example, rather than either allowing or forbidding insider trading, a firm would be required to disclose in its corporate charter the extent to which its officers may engage in insider trading. Then the shareholders would make their decisions accordingly.<br />
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What government should do is require meta-disclosure for all financial firms. A firm doing appraisals, audits, or ratings would be required to state in its charter whether it makes its findings public. If the accounting firm says that its audit methods and results are not public, then if a corporation board chooses to be audited by that firm, the shareholders and lenders would be warned to be skeptical about an audit that claims that the company accounts are proper. If an appraisal firm says its findings are not public, then a buyer would be wise to doubt the truthfulness of the valuation. Market participants would discount non-disclosed products.<br />
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Meta-disclosure is not an intervention, because it enables property rights to be clearer and better protected. A pure market is not a case of “anything goes.” Contracts among ill-informed parties are not morally proper. Therefore Joffe is basically correct in advocating disclosure, but in my judgment a meta-disclosure requirement is sufficient. The weakness is therefore not of the market as such but of the failure by government to have a basic “law of the market” requiring meta-disclosures not just by firms but also for products.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-61825235835554020282013-02-25T09:20:00.001-08:002013-02-25T09:20:07.628-08:00Attacks on Financial TransactionsThe European Union has proposed a tax on financial transactions for eleven members that use the euro, including Germany, France, Italy, and Spain. The EU would impose a tax of one-tenth percent on the trading of shares of stock, bonds, and other financial assets, both on the buyer and on the seller. There would also be a tax of one-hundredth of one percent on the trades of derivatives such as options.<br />
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The proposed tax would raise about 50 billion euros per year to reduce the European government deficits, and it is claimed that the tax would reduce “irresponsible” financial speculation. On January 23, 2013, the EU’s finance ministers endorsed the financial transaction tax (FTT). <br />
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While superficially it may seem that the mere trading of stocks and bonds would not be productive, in fact there is an economic benefit to financial transactions, as they move funds to those areas that the market actors believe are most productive. The financial movement of funds then impacts the real economy, which needs the financial sector for investment. Any economist will tell you that it is best to minimize transactions costs.<br />
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Indeed the European Commission has estimated that the FTT would reduce the GDP of the eleven economies by .28 percent. But one also has to consider how the revenues are spent. If the funds are invested in these economies, such as for education or infrastructure, the combined GDPs would increase by .2 percent, for a net loss of only .08 percent. But then the tax revenue would not reduce the countries’ deficits.<br />
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A tax on transactions shifts them to less-taxed places. Even though the tax rate seems small, some financial actors make many trades, seeking small discrepancies in prices. They would move their business away. But the proposed tax would cast a wide net, fishing for taxpayers outside the territory of the taxing countries. The proposal uses the “issuance principle,” in which a trade of an asset originating in the home territory can be taxed even if the parties are outside the territory. For example, if an American buys a stock in a French company, and the seller is in Japan, the transaction would be taxed, on top of taxes imposed by the traders’ countries. <br />
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Some European countries already tax financial transactions. France taxes the purchase of shares in large companies at a rate of .2 percent. After the implementation of the tax in August 2012, trading in these shares were reduced relative to non-taxed shares. <br />
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Another effect of taxing transactions is avoidance. Financial guys are clever, and they will find ways to circumvent a tax by creating new types of securities and derivatives. <br />
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High-frequency trading did not cause the Crash of 2008. An error in the software could cause a temporary fluctuation in pricing, but the normal operation of computerized trading is to thicken the market, to add many more transactions that add liquidity, making it possible for financial actors to quickly buy and sell at the current market prices. Frequent trading involves arbitrage, equalizing the prices of assets in various locations, and that is beneficial. Of course the financial markets can be manipulated, facilitated by high-speed trading, but a tax on transactions will not stop speculation, manipulation, and the fabrication and multiplication of derivatives.<br />
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As to government revenue, the root reason for the chronic deficits is that the current tax systems punish production and consumption. Europe has a value-added tax (VAT), a tax on the value added by each stage of production. Is it good or bad to add value? Of course it is good, which is why any produced value should not be taxed. The VAT destroys the essence of the economy, value added. Taxes on income and goods are also destructive.<br />
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While Europe punishes production and consumption, it subsidizes its landed aristocracy. Today’s European aristocracy may not have fancy titles and serfs tied to the land, but the economic impact is the same as in the old days of royalty. Today’s landed aristocracy consists of persons having title to land, who do not pay back to the state the rent and land value created by the state’s public goods and welfare spending. People don’t see this implicit reality, because they no longer see the appearance of the old titles of Baron, Lord, Earl, Duke, Prince, and Grand Poobah.<br />
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The subsidy of the land barons implies that public revenues have to come from productive activities, including financial transactions. But high taxes on production have the effect of depressing the economy, and meets political resistance, so governments borrow to finance the welfare state. Government welfare ends up pushing up land rent, and so tenants get taxed by paying more for real estate, for which they superficially blame landlords and the market.<br />
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The concept of taxing financial trading is old. A tax on currency conversions was popularized by the economist James Tobin, and is sometimes called the Tobin Tax. The term was then applied to taxing financial transactions in general. <br />
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London is a major global location for finance, and the economy of the U.K. depends on the finance industry. The FTT would damage the economy of the UK. The tax would impose costs on brokerage firms and banks outside the taxing countries. Its implementation would be costly and add one more bureaucracy to a European Union already suffering from euro-sclerosis.<br />
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Europe is slowly committing economic and cultural suicide on many fronts: economic, demographic, and environmental. We may still be able to visit its interesting ruins, but economic dynamics are shifting to Asia. Financial activity will keep shifting to Hong Kong and Shanghai as Europe and also America keep tax-punishing production and transactions.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-13167666296983779652013-02-15T11:43:00.001-08:002013-02-15T11:43:49.488-08:00US Bans Americans from Predictions MarketOn November 2012, the predictions market Intrade announced that U.S. persons would no longer be able to hold accounts and engage in its predictions trades. The U.S. federal government has jurisdiction over financial markets within its territory, but Intrade is located in Ireland. However, the U.S. government also has jurisdiction over U.S. persons world-wide.<br />
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Intrade provides betting contracts for future events such as elections, the weather, the Academy Awards, and financial market averages. For example, there was a predictions contract for the U.S. presidential election of 2012. One could, for example, on the Intrade web site, buy a contract for Obama to win. If the current price was $60, one would pay $60 for the contract, and then if Obama won, one would get back $100, for a gain of $40. If Obama lost, the contract holder would lose the $60. <br />
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The price of the contract was based on the bids and offers of the participants. If more speculators believed that Obama would win, they would bid to buy the win contracts, which would push the price up. If more later believed that Obama would lose, they would sell the contracts, since they would collect $60 if they were right, and push the price down.<br />
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Economists who have studied such predictions market have concluded that these markets make more accurate predictions than do polls. That is because the speculators have seen the polls, and they go beyond the polls to analyze the campaigns or financial markets to estimate the future outcomes. The bettors are placing their own money, so they have a keen interest in getting the bet right. In fact, the Intrade market for the U.S. presidential election of 2012 correctly predicted the win by Obama, whereas the polls were evenly split.<br />
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In 2012 Intrade yielded to pressure from the U.S. government, and told its American customers that their accounts would be closed in December. The Commodities Futures Trading Commission charged Intrade with violating its ban on off-exchange commodity options trading. The CFTC’s complaint also accuses Intrade of making false statements about their options trading website. Americans are allowed to trade only on CFTC-registered exchanges. The CFTC considers it a commodity option market if the traders can bet on whether, for example, the price of gold will be $2000 per ounce or greater, on December 31, 2013.<br />
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The CFTC claims that its “requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity.” But to my knowledge, none of the participants of Intrade were victims of fraud. There was no evident lack of market integrity.<br />
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In a completely free society, with a pure free market and true free trade, there is no restriction or tax on peaceful and honest human action. Nobody is harmed when a person voluntarily buys a contract on whether some future event will occur. Government agencies such as the CFTC, which are supposed to protect market participants, instead end up preventing them from engaging in what to them seems the most profitable and interesting opportunities, which also provide social benefits. Predictions markets benefit society by reducing the uncertainty of the future. These markets provide a measurement of the expectations of people who are betting their own money. Predictions markets facilitate better forecasts by rewarding those whose insight is right and penalizing those whose analysis was faulty.<br />
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The U.S. government also restricts gambling on the Internet, even when the web sites are in foreign countries. U.S. government officials criticize foreign countries for restricting the freedom of expression and reading, but it too imposes restrictions and prohibitions.<br />
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Intrade will continue to have contracts held by non-Americans, and there are other predictions markets besides Intrade. But every year brings ever more restrictions, mandates, and taxes on peaceful and honest human action. Each additional intervention reduces the equity and efficiency of the economy. Each extra imposition is like another rock on a ship, so we should not be surprised at the current slow progress of the economic ship, the continuing high unemployment and sluggish growth. Keep adding more rocks, and eventually the ship will sink. <br />
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One of my favorite quotes is from the German philosopher Hegel: “What experience and history teach is this - that nations and governments have never learned anything from history, nor acted upon any lessons they might have drawn from it." We seem to have learned nothing from the decline of civilizations such as that of the ancient Mayans, Egyptians, and the Roman Empire. Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-77023973506714683162013-01-26T09:54:00.000-08:002013-01-26T09:54:33.178-08:00Economic RationalityThe concept of rational action is a frontier of economic theory. The new field of behavioral economics combines economics and psychology to analyze actions that seem to be irrational. For example, people value health and long life, yet they smoke and eat unhealthy food. A related field, behavioral finance, examines psychological and emotional traits that prevent people from making wise investments. Perverse psychological biases include anchoring to past prices and facts, the bias of weighing recent events too highly relative to the more distant past, being overly confident in one’s abilities, and following the herd to a cliff.<br />
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Neoclassical economics often assumes that people are purely self-interested and always seek financial gain, and that therefore altruism is irrational, whereas as Adam Smith and Henry George wrote, human beings have two motivations: self interest and sympathy for others. Since people get satisfaction from serving others, it is incorrect to label altruism or actions based on subjective views of justice as “irrational.”<br />
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The Austrian school of economic thought has a different perspective on rationality. The Austrian economist Ludwig von Mises envisioned human action as inherently rational. A person has unlimited desires and scarce resources. Human beings economize, seeking maximum benefits for a given cost, or minimizing costs for a given benefit. At any moment in time, a person ranks his goals, ranging from most to least important. He chooses the resources to achieve the most important goal at some moment, then the second most, and so on, until his gains from trade have become exhausted. This is the inherent rationality of human action.<br />
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The process of satisfying one’s ends involves exchange, trades with others as well as trade-offs among one’s own resources. For example, if you goal is to eat delicious food, you trade the money you value less highly for food you value more highly. Economizing man seeks to maximize the utility, i.e. the importance and satisfaction gained, from one’s resources.<br />
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Note that economic rationality involves means rather than ends or goals. If a person chooses to drink so much vodka that he gets drunk and then gets sick, there was a reason for doing so, and at that time, he believed that this would maximize his utility. Utility theory does not pass judgment on people’s goals. Utility theory analyzes the means to an end, whatever that end may be.<br />
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The man who gets drunk may later regret his action, but rationality has to be based on human action at the moment it occurs. At that moment, his knowledge, emotions, and desires lead him to make a particular choice. At a later moment, he may have different knowledge, emotions, and desires - too bad, because we can’t go back in time. The action was utility maximizing at that time, even if it turns out to be bad in the future.<br />
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Rationality in economics is different from rationality in psychology. A psychologist may judge getting drunk as an irrational desire, but an Austrian-school economist recognizes that values are purely subjective, and he takes any particular desire as just data, and economic rationality does not apply to data. <br />
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Economic rationality has three criteria:<br />
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1. A rational person has a sound functioning mind. He generally observes and understands reality. We all have incomplete knowledge, and many people hold false beliefs, and rational people may have differing interpretations of observations. But people substantially out of touch with reality, such as due to drugs or dementia, are beyond the domain of economic analysis.<br />
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2. Rational people economize. Economic theory is based on maximizing benefits and minimizing costs. Economics does not claim that all people necessarily economize, but if they do not do so, they are not rational, and we send them to the Department of Psychology to analyze, since economic theory can only analyze rational action.<br />
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3. The preferences of rational persons are consistent. For example, if one prefers an apple to a banana, and a banana to a cantaloupe slice, consistent preference implies that one prefer an apple to a cantaloupe slice. If not, then that person is irrational, and economists send him to abnormal psychology for analysis, since economic theory does not apply to inconsistent preferences.<br />
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Given that meaning of economic rationality, what about the perverse psychological biases? Overconfidence is consistent with rationality, since the person is not directly observing what is not there, but interpreting and misjudging his ability as more potent that it turns out to be. A rational person may believe that a black cat brings bad luck, without any evidence, but the rational person does not see himself surrounded by black cats which don’t exist. We call religious belief a “faith” because it is not based on verified evidence, but religious people are nevertheless rational. Merely believing in what is not observed does not imply irrationality. <br />
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Behavioral economists sometimes use the term “quasi-rationality” for action that is objectively sub-optimal, but to an economizing man, the future is always uncertain, knowledge is always incomplete, and beliefs cannot all be based on personal evidence, so action is quasi-rational only with hindsight, and not at the moment of choice.<br />
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Likewise, with recency bias and anchoring, people weigh some facts and events too much, but again, this is a matter of interpretation rather than direct observation. Suppose somebody buys a financial asset for $50 and the price later falls to $40, and he does not want to sell, because he does not want to experience a loss. In fact, he has already lost $10 per share, and the optimal financial decision has to ignore what he paid, and focus only on expected future risks and yields, but the person anchored to a past price is also weighing in the emotional trauma of acknowledging a loss, so he is still rationally maximizing utility even when keeping a share of stock that is going ever lower.<br />
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Likewise the smoker is rational in, at the moment of choice, choosing the immediate pleasure (or avoiding the pain of withdrawing from smoking), over the long-run desire for good health. There are tradeoffs between short-term pleasure and long-term goals, and choosing the short-term pleasure is not irrational, because one’s subjective value at that time is for the pleasure.<br />
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Economic psychology has also analyzed the mental process of choice, concluding that much of what we think of as reasoned choice is really induced by subconscious feelings. Much of what we do is based on habit. But even with complete determinism, it is still the case that, at every moment in time, a person thinks and feels that he is weighing costs and benefits to optimize utility, and that state of mind constitutes free will and rational action.<br />
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Therefore the claim of behavioral economics and behavioral finance that people do not act rationally is based on a psychological rather than economic meaning of rationality. So long as people can generally observe and believe reality, and they economize to achieve ends, and their preferences are consistent, they are rational, even if they do what they later realize was foolish. <br />
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We can well call destructive government policy irrational, but that is a different meaning of rationality than what applies to a choice made by an individual person. The paradox of humanity is that our actions are based on reason, and that human action is rational, yet collectively human beings engage in war, environmental destruction, and economic waste that is inconsistent with the desire of most to live peaceful, prosperous, happy lives.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-82298174192050504772013-01-09T08:39:00.003-08:002013-01-09T08:39:56.908-08:00The Disunited Parties of AmericaWhereas Americans suffered the trauma of moving towards the Fiscal Cliff of 2012, and whereas the divided Congress resolved it only partly and for the short run, and whereas the Republicans and Democrats have vastly differing ideologies and policies for the USA, and since challenger parties have even more radically differing views, one impossible remedy would be to split up the government into the party lines. <br />
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If you don’t like political fantasy, then stop reading. Otherwise, here is how the fantasy would work. Americans would choose to belong to one of several political parties, or they could choose, by default, the Nonpartisan Party, which would continue current laws and policies. (We cannot call the Nonpartisan Party the “Independent Party,” because there is already an American Independent Party which is a political party.)<br />
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Each party would have its own president and congress, and its own regulations, taxes, spending, and currency. The country would still have a single military, Supreme Court and a federal Constitution amended so that each party would have autonomous control over its own members, recipients of transfer payments, and territory. The joint Congress elected by all the people would still function to authorize spending for foreign affairs and the military.<br />
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Consider first the Republican Party. The Republican Congress would enact its own tax structure. The federal debt and unfunded liabilities (promised transfer payments for Social Security and Medicare) would be divided among the party governments by population, so that each party government would be obligated to pay its share of current and promised transfer payments. If it has one third of the population, the Republican government would have responsibility for one third of the national debt.<br />
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The territory of the Republican government would consist of the private land owned by its members, plus a population-based proportional share, both assets and liabilities, of federal property. The Republican government would inherit the current laws, but could then change them. They could reduce their income tax rates, but any added debt would be handled with Republican Government bonds. They could cut domestic spending for their members, and they could change Social Security, Medicare, and Medicaid for their new members and the future incomes of their members.<br />
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The same authority would apply to the Democratic, Libertarian, Green, one or more socialist parties, a social-conservative party, and others. A new party would be authorized if it had ten thousand members. There could thus be a Geoist party that enacted a Georgist single tax on land values (including a tax on dumping pollution into the people’s land). They would attract millions of members, because only the Geoist party would leave workers and enterprises tax-free. (The Libertarian Congress would most likely keep and enact national sales and excise taxes, as was advocated by their previous presidential candidates.) <br />
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As a member of the Geoist Party, I would propose that, in order to get landowners to enrol, landowners with net tax losses would be compensated with geo-bonds. Geo-bonds would be backed by a strong asset: they would have the first claim on the future rents of Geoist land.<br />
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The Disunited Parties of America would offer Americans a choice of governance. The division would not be pleasant, but it would at least enable each party congress to deal with fiscal issues without the delays and special-interest concerns that are blocking long-term solutions.<br />
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Probably the Libertarian Congress would establish its own currency to replace today’s federal reserve notes. They would implement free-market banking. I imagine the Libertarian Congress would mint half-ounce gold coins with a denomination of $1000, engraved with the picture of the Austrian-school economist Ludwig von Mises. The banks in Libertarian land would issue their own currency convertible into Mises gold dollars. Mises bank notes and accounts would be adopted by people in the other party lands, as it would be sound money not vulnerable to inflation. The Republican and Democratic congresses would surely choose to remain with the federal reserve system.<br />
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How well the Geoist party economy prospers depends also on its monetary policy. There would be a big battle within the party on whether the Geoist Congress would directly issue fiat currency, or whether to have a free market in money and banking. If the fiat-money faction won, the outcome would be uncertain, as the debt service of geo-bonds could be high because of uncertainty about any future monetary and price inflation. I would vote for financial free trade, but would probably be outnumbered by the fiat money advocates. I imagine most business and households in geo-land would use the libertarian gold-backed money, and they would prefer to hold libertarian bonds that are denominated in gold-backed money that would be free of any inflation, tax, and uncertainty premium. <br />
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The Disunited Parties of America would resolve the tax debates. The Democrats would have high taxes on the wealthy, but all the wealthy persons would join the Geoist and Libertarian parties. The Republicans would have low income taxes and low welfare payments, but enterprises and wealthy people would also abandon the Republicans for the Libertarians and Geoists, and socially liberal people would abandon the party due to its strict social-conservative controls on speech, reproduction and drugs. The socialist parties would have high welfare spending for the poor, but no money to pay for it. The Libertarian Party would have some rich landowners and oil companies, but their 40-percent national sales tax would leave it with few residents in the middle and lower income classes. <br />
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The Geoist Party would end up with most of the people and land, but it would pay a high debt service for geo-bonds if buyers feared future fiat monetary inflation. With the Democrats and Socialists bankrupt, middle and lower-income folks would join the Geoist Party, since both their income and spending would be tax-free, and there would be full employment at higher wages than in the other party lands.<br />
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None of this will happen, but it shows that one source of the problem is an economic policy that is forced on everybody, in contrast to a pure market economy in which each person, family, and local community can choose its own borrowing and spending. The beauty of the market is that it caters to our individual differences, replacing military and political conflict with a diverse market that satisfied our individual desires.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-5501887765025355212013-01-01T16:07:00.001-08:002013-01-01T16:07:20.338-08:00Abandon all Constitutions, Ye who enter CongressThe Constitution of the United States of America authorizes Congress to levy taxes. But now Congress has authorized an agency to obtain revenue without annual Congressional action. That agency is the Consumer Financial Protection Bureau. Created by the “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010" as a bureau within the Federal Reserve System, the CFPB gets its funding from the Federal Reserve (the “Fed”) rather than from the US Treasury. The Bureau thus escapes Congressional oversight.<br />
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The main purpose of economic science is to enable us to understand the implicit reality beneath superficial appearances. The superficial appearance of the CFPB is that it is not a burden on the taxpayers. This is because in appearance, the Fed is not funded by the taxpayer, but rather from the interest income from the Fed’s huge bond holdings. In appearance, the Fed makes a profit, because the interest income of the Fed is greater than its expenses, and the Fed returns the “profit” back to the US Treasury.<br />
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Every interest dollar spent by the Fed is a dollar not returned to the Treasury. Thus when the CFPB takes some of that interest money, these are funds that would have gone to the Treasury, but are now shifted to the CFPB. If we want to give the CFPB a nickname, as we do for example for Fannie Mae, we could call CFPB the Crafty Poobah. The CFPB indirectly taxes the public by reducing the funds that would otherwise go to the Treasury, therefore requiring greater taxation to achieve the same level of spending.<br />
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Of course the U.S. Treasury also borrows funds, but the economic reality is that every dollar borrowed by the government is in effect a tax on somebody. Borrowing postpones the tax payment, but not the actual tax. When government borrows a dollar, it imposes at that time an implicit tax, to be paid explicitly later, with interest. Either a taxpayer will pay more taxes in the future, or else a bondholder will be taxed by the reduction in the value of his government bond, such as from higher inflation or from a repudiation (cancellation) of the debt. <br />
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There are free lunches, but the funding of the Crafty Poobah is not one of them. Not only does the CFPB indeed impose a tax burden, but by bypassing Congress, the CFPB violates the Constitution. The agency can spend money without an appropriation by Congress. The CFPB is authorized to request up to $200 million in discretionary appropriations if the funds authorized by the Dodd-Frank Act are not sufficient for its budget.<br />
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The CFPB also imposes costs via regulations on financial firms, on top of the regulations already imposed by the Fed, the FDIC, and other regulatory agencies. The law that set up the CFPB has given the Bureau a broad and vague mandate to “protect” consumers. <br />
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The CFPB consolidated consumer-related programs in the Federal Trade Commission, the Federal Deposit Insurance Corporation, and other agencies. so to some extent, it transferred funding from them. But the Bureau also duplicates the programs of other agencies, including the Securities and Exchange Commission, and the state consumer protection departments. <br />
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In his article “CFPB Needs a Day in Court” in <i> Human Events </i> 17 November 2012, George Will notes that sixty percent of its employees in 2012 had lavish salaries of more than $100,000 a year, and five percent were making $200,000 or more. He points out that heavy regulation favors the big banks over the small ones, as the big ones already have an army of lawyers and accountants to handle the rules. <br />
<br />
Also consumer “protection” can end up hurting consumers and the economy by limiting access to credit. One of the reasons the economic recovery from the Depression of 2008 has been slow is credit constraints, in large part imposed by the federal government. The typical pattern in the “business” cycle is for credit to be too loose during the boom and too tight after the crash.<br />
<br />
Congress and the courts have voided the U.S. Constitution in many ways, such as by ignoring the 9th Amendment, by blurring the Constitutional distinction between direct and indirect taxes, by stretching the meaning of commerce among the states, and by pretending that all its spending is under the rubric of the “general welfare” rather than the particular welfares of special interests.<br />
<br />
Now Congress has gone a big step further away from Constitutionality by creating a Bureau that gets its funding from the Fed rather than from Congress. The original purpose of the Fed was to control the country’s money, to set the reserve requirements of banks, and to be a lender of last resort for the banks. Now the Fed has a consumer bureau that draws funds from its interest income. What is next? The pride of America has been its Constitution, but it is being replaced by two words, “Anything Goes.”<br />
<br />
Consumers do need protection from fraud, but if the federal government is to do it, be honest and create an agency within the Department of Commerce that gets its funds from the Treasury. Good government makes the explicit appearance coincide with the economic reality, and that is the opposite of what Congress has done with the Crafty Poobah.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-33744420016892513902012-12-28T07:12:00.002-08:002012-12-28T07:12:49.045-08:00Community Reinvestment Act’s ProblemConclusion leapers have blamed the Great Recession and Crash of 2008 on the greed of real estate lenders and speculators, but that does not explain the timing, and does not explain why individual follies coincided. When the whole economy is disturbed, the government is usually the cause, because only government can use systemic force.<br />
<br />
In physics, the equation for force is F=MA, where F is force, M is mass, and A is acceleration. Applied to the economy, force consists of laws, taxes, and subsidies. Mass is assets and liabilities. Acceleration is a change in momentum.<br />
<br />
Momentum is mass times velocity: MV. Suppose the mass of the economy is moving at some constant velocity, i.e. speed and direction. Then a force causes a change in the velocity, i.e. the mass accelerates by changing speed or direction or both.<br />
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One of the acts of force the U.S. federal government initiated is the Community Reinvestment Act of 1977 (title VIII of the Housing and Community Development Act of 1977) and its enhancement in 1995. <br />
<br />
A major expansion of CRA-based loans began in 1995. There were economists who warned that this would cause major trouble. As stated in the <i> Wikipedia </i> article on the CRA:<br />
“During one of the Congressional hearings addressing the proposed changes in 1995, William A. Niskanen, chair of the Cato Institute, criticized both the 1993 and 1994 sets of proposals for political favoritism in allocating credit, for micromanagement by regulators and for the lack of assurances that banks would not be expected to operate at a loss to achieve CRA compliance. He predicted the proposed changes would be very costly to the economy and the banking system in general. Niskanen believed that the primary long term effect would be an artificial contraction of the banking system. Niskanen recommended Congress repeal the Act.”<br />
<br />
From 1995 to 2008, CRA loan commitments leaped from a few billion dollars to 6.1 trillion dollars. Some economists have not believed that the economy had CRAP - a Community Reinvestment Act problem. But now the prestigious National Bureau of Economic Research (the organization that officially designates the dates of recessions) has published a study that concludes that the CRA indeed was a major contributor to the Depression of 2008.<br />
<br />
The title of the NBER publication is the question, <i> Did the Community Reinvestment Act (CRA) Lead to Risky Lending?</i> The answer of the authors is conclusive: "Yes, it did. ... We find that adherence to the act led to riskier lending by banks."<br />
<br />
In 2000, the federal Housing and Urban Development department increased the quota of “affordable housing” for Fannie Mae, the government-sponsored mortgage-buying company, by fifty percent. Fannie Mae and its sibling Freddie Mac buy mortgages from banks, enabling them to provide more mortgages without limit. In a banking conference in 2000, Fannie’s Vice Chair described "CRA-friendly products" as mortgages with less than "3% down" and "flexible underwriting." Flexible lending includes what bankers called “liar loans,” loans for which the banks did not verify the claimed incomes and other data of the borrowers. According to an article in <i> Investors Business Daily, </i> Fannie and Freddie bought half the CRA loans.<br />
<br />
Several economists had previously blamed the CRA for the housing crash, including Thomas Sowell in his 2010 book <i> The Housing Boom and Bust. </i> In my review of that book for <i> Choice, </i> a journal for librarians, I summarized Sowell’s proposition on the origins of the housing bubble as, first, restrictions on development that made land values rise rapidly in some areas such as California, and secondly, the Community Reinvestment Act, which coerced banks to provide mortgages to low-income and minority borrowers. Sowell argues that the anti-discrimination rationale that promotes home ownership for minorities is based on faulty analysis, and was futile as low-income lost their homes after 2007.<br />
<br />
However, there is a more fundamental cause of the Depression of 2008, a governmental force that caused all the major depression of the USA along with those of other countries. There is a force that has periodically disturbed the economic space-time continuum. Applying F=MA, that governmental force has caused the mass of the economy, particularly land values and investments in real estate construction, to periodically accelerate and decelerate. The force that has disrupted the economy for the past 200 years is: massive subsidies to land values.<br />
<br />
Government’s public goods and welfare subsidies make territory more attractive and productive, generating greater land rent and higher land values. The subsidies are implicit in artificially low interest rates due to money expansion, and the fiscal subsidies of taxing mostly labor and goods rather than having landowners paying back the rents generated by the public services. <br />
<br />
As the economy expands, the higher land values induce “malspeculation,” the purchase of land based on the expectations of ever higher prices. At the peak, the most optimistic speculators are the ones left holding the land bag, as real estate crashes, bringing down with it the financial infrastructure. The high acceleration of economic mass near the peak of the boom is followed by a swift and severe deceleration, the crash and depression.<br />
<br />
We are now into a new cycle, in which once again the Federal Reserve has expanded the money supply, this time more massively than ever before, to keep interest rates low, again a subsidy to real estate, which is again reviving, and will again a decade from now, crash. The next crash will be even worse than that of 2008, since there will also be a fiscal crisis from the ever growing federal debt, as the government will no longer be able to borrow funds cheaply. <br />
<br />
As the philosopher Hegel wrote, governments do not learn from history, and that is why the cycle is repeating again. The basic cause of the boom-bust cycle is not the CRA, but the subsidy to land values, because if not for that subsidy, land would be cheap to buy, enabling less affluent buyers to not need so much credit for the purchase of a home.<br />
<br />
<b> References </b><br />
<br />
"Community Reinvestment Act." <i> Wikipedia.</i> <http://en.wikipedia.org/wiki/Community_Reinvestment_Act><br />
<br />
Paul Sperry. 20 Dec. 2012. <i> New Study Finds CRA 'Clearly' Did Lead To Risky Lending.</i><br />
<http://news.investors.com/ibd-editorials-perspective/122012-637924-faults-community-reinvestment-act-cra-mortgage-defaults.htm><br />
<br />
Sumit Agarwal, Efraim Benmelech, Nittai Bergman, Amit Seru. 2012. <i> Did the Community Reinvestment Act (CRA) Lead to Risky Lending?</i> NBER Working Paper No. 18609.<br />
<http://www.nber.org/papers/w18609><br />
<br />
<i> Study Says Community Reinvestment Act Induced Banks To Take Bad Risks.</i><br />
by J.D. Tuccille, 21 Dec. 2012. Reason.com <http://reason.com/blog/2012/12/21/study-says-community-reinvestment-act-in><br />
<br />
Thomas Sowell. 2010. <i> The Housing Boom and Bust.</i> New York: Basic Books.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-60001475052266730142012-12-16T12:18:00.004-08:002012-12-16T12:18:39.729-08:00The Pigou ClubProfessor N. Gregory Mankiw of Harvard University initiated and hosts “The Pigou Club” of economists, journalists, and politicians who have favorably written about pollution levies as an efficient way to reduce emissions. Arthur Cecil Pigou was the economist who was the first to deeply analyze externalities (uncompensated effects on others) in his 1920 book <i> The Economics of Welfare.</i> <br />
<br />
Pigou proposed a levy on negative external effects equal to the social cost, so that buyers and users pay the full social cost of products. The most common applications are tolls to prevent traffic congestion, parking meters that vary by time of day, and pollution levies.<br />
<br />
The policy of charging those who create negative externalities is named Pigouvian, or Pigovian. Mankiw advocates higher gasoline taxes, but that would also tax those car owners with cars that run quite cleanly and are driven in roads that are not congested. The best Pigovian policy is to focus the charge on the negative element such as harmful emissions. <br />
<br />
Tax the bad output, rather than the input. If a carbon tax is on the emissions, there is an incentive for inventors and entrepreneurs to minimize the toxic outputs. If a carbon tax is on the input, that incentive is gone.<br />
<br />
Statist economists refer to a Pigovian tax as correcting a market failure, while free-market economists recognize that in a pure market economy, all activity is voluntary, and so there are no significant negative externalities in a pure market. Pollution invades others’ property, and such trespass would require compensation, which would prevent the external effect. Compensated effects internalize the costs.<br />
<br />
Members of the Pigou Club include Al Gore, Alan Greenspan, Paul Volker, and Paul Krugman. Members range from conservative to statist liberal to green to libertarian. Essentially, any person who thinks clearly and objectively about externalities is going to be a Pigovian.<br />
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Environmentalists and economists have proposed a “green tax shift” to replace taxes on incomes and sales with taxes on environmental destruction. That would provide the double benefit of a greener environment and a more efficient economy. <br />
<br />
Despite the Pigovian pollution charge being so obviously the optimal policy, the Obama administration has rejected it. An article in <i> The New Yorker </i> of 10 December 2012, “Paying for It” by Elizabeth Kolbert, describes Pigovian policy. It points out that global climate change is a planetary externality. Users of carbon-based fuels, especially coal and oil, are not paying the full cost of the energy. The cost is shifted to the victims of climate change, with ever worse storms and droughts and floods. The cost is also shifted to future generations who are unable to vote today. <br />
<br />
To the extent that global warming has been caused by emissions, this is an environmental tax imposed on the human, animal, and plant world. Moreover, today’s massive pollution is unnecessary, because all economies could implement the green tax shift. The developing countries all have harmful taxes that could be replaced by Pigovian payments.<br />
<br />
There seems to be not enough government revenue to pay for the billions of dollars needed to reduce pollution and protect against storms and rising seas, but when a disaster such as the New York City and New Jersey storms happened, funds arose to repair the $60 billion in damage. <br />
<br />
Even oil companies have become Pigovian. It is therefore puzzling that President Obama has not come on board the Pigou train. He did not favor a tax on emissions as a candidate, and according to the <i>New Yorker</i> article, his spokesman Jay Carney stated, “We would never propose a carbon tax, and have no intention of proposing one.”<br />
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The executive branch of the U.S. government is insisting on higher taxes for the rich just because the money is there, and even though basic economics tells us that higher costs and lower profits will push ever more firms out of the country, and the firms remaining in the country will avoid bringing their foreign earnings back home. <br />
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Levies on pollution are a tax in form, but in substance, they prevent a subsidy, since consumers are subsidized when they do not pay the full cost of their purchases. A tax on land value too is the prevention of the subsidy of rent generated by public goods. Therefore the best taxes are those that are not taxes in substance, but the avoidance of subsidies. <br />
<br />
Thus the administration seeks on the one hand to tax the rich, and on the other to hand the rich a land-value and pollution subsidy. Evidently the administration prefers to regulate pollution, but regulations have done a poor job of preventing today’s massive environmental destruction, and regulations do not enable a green tax shift. <br />
<br />
We should include A. C. Pigou to the pantheon of the ten great economists: Adam Smith, David Ricardo, Henry George, Alfred Marshall, Milton Friedman, Carl Menger, Ludwig von Mises, Friedrich Hayek, and James Buchanan. The 100th anniversary of his book in 2020 may spur some Pigovian action, but meanwhile we will suffer eight more years of global damage.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-77498837897160935292012-12-08T09:41:00.002-08:002012-12-08T09:41:15.996-08:00What is a Fair Share of Taxes?What is fair is different from what is just. What is just is determined by the ethic of natural moral law as expressed by the universal ethic. The universal ethic prescribes that all acts, and only those acts, that coercively harm others, are evil. Justice is the implementation of the universal ethic in law. Justice is applied by prohibiting and penalizing evil acts, and by keeping all other acts free of restrictions or imposed costs.<br />
<br />
The premises from which natural moral law derive are the biological independence of thinking and feeling, and the equal moral worth of all human beings. Thus a foundation of justice is equality before the law. People with equal conditions should be treated the same.<br />
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Equality implies that all persons are equal self-owners. If one person imposes his will on another, the victim becomes a slave, and the tyrant becomes a master, in violation of equality. Self-ownership implies that one fully owns one’s labor, and therefore any tax on wages or the products of labor, or the spending of wages, violates self-ownership, and is unjust. <br />
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Self-ownership does not apply to what the self does not create, namely, natural resources. The equality premise implies that all persons benefit equally from the value of what nature provides. The value of natural resources, including spatial land, is measured by how much people are willing to pay to use them, namely, the economic rent. Economic justice requires that all persons have an equal share of the natural land rent, and that each worker be free to keep his entire wage.<br />
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A just tax system does not tax wages, goods, exchange, value-added, and entrepreneurial profits. Economic justice is implemented by collecting the economic rent of land and distributing it either in equal shares of cash or in public goods that benefit the public generally. The rent generated by nature would be globally distributed, while the land rental generated by local population, commerce, and public goods would be distributed to the local population.<br />
<br />
Since the rent morally belongs to individual persons in equal shares in the relevant communities, a strict application of equality would be to rent payments in cash, which individuals could use to pay for services such as education or, as members of some association, as dues for the provision of public goods. Such payments are often referred to as citizens’ or residents’ dividends.<br />
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“Fairness” means that you get what you deserve, and deserve what you get. Like justice, fairness applies equality. We are born with a genetically programmed sense of equality. Children instinctively feel that it is unfair for one to get a better toy than another. But the application of equality in fairness is broader than in justice<br />
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It is not fair for some persons to be more talented or beautiful than others. A person who is born with high intelligence, beauty, strength, and talent did nothing to earn these qualities. One person does not deserve to have a better genetic inheritance than another. Nature is unfair.<br />
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A financial inheritance is also unfair. When a child is born to rich parents, the child has done nothing to deserve the good fortune. It is unfair for one child to have a rich family while some other child has a poor family. <br />
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It is also not fair for some people to live in a country at peace, while other have to suffer thru war. Those who suffer from violence, persecution, and arbitrary negative discrimination do not deserve these outcomes. <br />
<br />
But morality requires justice rather than fairness. As the saying goes, “life is unfair”. However, natural moral law, when applied, does remove that portion of unfairness, such as violence, that is also unjust.<br />
<br />
When politicians and commentators talk about making people pay their “fair share” of taxes, they seldom analyze what “fairness” means. They presume that it is fair for the rich to pay a greater share of their income in taxes than the poor, and that even though the rich today are paying a very large portion of taxes, they should pay even more. But fairness advocates have no logical formula for determining how much is “fair.” They also provide no analysis as to what extent the incomes of the rich are deserved.<br />
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A pure fair tax would confiscate gains from those who have undeserved qualities such as genetic and financial inheritances. A truly fair tax would collect all the land rent and distribute it equally, because nobody deserves more of the land rent than anyone else, but it would go beyond that to tax and redistribute equally all gains other than what one earns from one’s labor.<br />
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But these outcomes are not what advocates of “fair” taxation want. The “fair share taxes” organization seeks to eliminate property taxes and to keep taxing income including wages. They also want to tax net worth, which would tax savings from labor.<br />
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The “fair tax” organization seeks a national sales tax, with no sound analysis of what fairness means. If a tax on wages is unfair, because one deserves what one earns, then it is equally unfair to tax wages when they are spent. A national sales tax would also subsidize land values as the public goods paid for by sales taxes would generate undeserved land rent and land value. <br />
<br />
Most advocates of fairness in taxation have a subjective feeling of what is fair, and indulge in not having examined the ethical and economic aspects of fairness. We should be advocating justice rather than fairness, because any fairness that goes beyond justice violates liberty and natural rights. Young children want everything to be fair, but mature adults should realize that we just have to accept the unfairness of one person being struck by lightning while others are not.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com1tag:blogger.com,1999:blog-23062420.post-49239197674057726612012-11-21T20:55:00.002-08:002012-11-21T20:55:30.699-08:00We Gather Together; the Economic Version<br />
by Fred Foldvary, 2012<br />
<br />
We gather together, as thanks for our blessings.<br />
Remember the lesson the Pilgrims did learn.<br />
They first reaped in common, and then they found out,<br />
That keeping what you sow, is the best way to earn.<br />
<br />
The Pilgrims at first, they were communist thinkers.<br />
They thought that the Lord wanted all to be shared.<br />
Then they had no harvest, and they faced starvation.<br />
To work for all the rest, was not what they cared.<br />
<br />
A meeting they held, and kept the land common.<br />
But each family could obtain its own plot. <br />
Then they went to work, and the harvest was bountiful.<br />
This economic lesson should not be forgot!<br />
Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-42248799539181653552012-11-18T09:00:00.001-08:002012-11-18T09:00:46.274-08:00The Fiscal CliffThe “fiscal cliff” is the economic plunge that will occur in the U.S.A. if Congress does not change the big tax hikes and spending reductions that will otherwise start on January 1, 2013. The income tax rate cuts enacted at the beginning of the ozo years (2000 to 2009), as well as the payroll tax cuts that followed the Crash of 2008, were temporary and are scheduled to expire at the close of 2012. <br />
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Congress enacted the Budget Control Act of 2011 to require “sequestration” - automatic sharp spending reductions in 2013 - unless it enacted the recommendations of a “supercommittee,” which then failed to achieve a consensus on raising revenues and cutting spending.<br />
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Now in mid November 2012 the economy is a train heading towards the cliff, and if Congress does not lay down a track to make the train veer off to the side, the economic train will plunge into another depression.<br />
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The redistributionists seek to sharply increase taxes on high incomes while leaving the reduced tax rates in place for lower and middle-income people, but merely taxing the rich will bring in much less revenue than needed to plug the deficit, and over the long run the high tax rates will shift ever more enterprise and employment out of the country. <br />
<br />
Most politicians agree that government spending has to be cut, but few are proposing specific programs to cut. The scheduled cuts include less military spending, and it would be sensible to greatly reduce U.S. military bases in Japan, South Korea, and Europe, but conservatives have opposed reductions in alleged “defense spending.”<br />
<br />
Another good candidate for spending cuts would be the elimination of the federal war on drug use. Colorado and Washington have now legalized the use of marijuana, but the possession remains illegal by federal law, despite any Constitutional authority for federal prohibition.<br />
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The best short-run remedy for the fiscal cliff would be the elimination of excessive spending such as for foreign military bases and the failed war on drugs, allowing the payroll tax cut to expire, and most of all, the removal of massive subsidies to land-rent seekers. <br />
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The public goods provided by government make territory more productive and attractive, which increases the demand for land, which generates higher land rent and land value, as the goods are paid for mostly by workers rather than landowners. The greatest of all subsidies is this increase in land value that subsidizes the owners of land and induces the excessive land speculation that results in real estate bubbles followed by economic collapse.<br />
<br />
The optimal long-run remedy would be the replacement of all taxation with levies on pollution and land value. These levies would in substance not be a tax but the prevention of subsidy, by having those who receive this unearned value pay it back. This tax shift should be combined with the elimination of government programs that do not generate land rent, such as the failed wars on victimless acts, and the reduction of military bases that originated in the occupations of Japan and Germany and the subsequent Cold War with the USSR that no longer exists.<br />
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The optimal long-run remedy would also phase out mandatory Social Security and offer workers the alternative of enhanced private retirement plans that would provide triple the retirement income while greatly increasing the supply of the savings that fuels investment and growth.<br />
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Congress could simply continue its current spending and tax rates while eliminating the legal obstacles to borrowing more funds. The “lame duck” session of Congress during November and December 2012 could postpone action to January 2013, when Congress could make retroactive changes. One of the most urgent needs is to again patch up the alternative minimum tax, a second calculation of taxes that increasingly burdens the middle class, as the previous patch expired at the close of 2011.<br />
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Another source of damage would be the scheduled sharp increase in taxes on dividends, as dividend income would be taxed at the same rate as most other income. The problem there is that this income comes from corporate profit that is already taxed at rates up to 35 percent. Although some corporations avoid taxation with various exemptions and deductions, the corporate tax rate does affect many companies, and the result, including state taxes and steeper taxes on dividends for higher-incomes, could be a total tax rate of up to 90 percent on dividend income. Because cash dividends are the foundation of sound financial investing, this capital punishment would stifle investment, growth, and innovation, and increase the use of risky debt, even more than has already been done. <br />
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Given the divided party control of Congress, the action with the least political resistance is the continuation of trillion-dollar federal deficits. That could avoid the fiscal cliff of 2013 but make that much worse the coming fiscal crisis, crash, and depression of 2026.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-53694685519108064842012-11-11T09:11:00.002-08:002012-11-11T09:11:59.392-08:00Forward to the Failed PastSome politicians like to use the slogan, “forward.” Sometimes it is more emphatic: forward!<br />
<br />
But one may well ask, forward to what? Time and the current of events are always moving us forward already, so evidently the forward-seekers want to change the existing flow sideways. The slogan “forward” has often been used by those who seek greater state-imposed collectivism. As propaganda, “forward!” sounds better than “leftward!” or “towards ever greater statism!”<br />
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Several publications of socialist parties during the 1800's were titled “Forward.” Lenin continued this tradition when he founded the Bolshevik newspaper “Vpered” (or “Vperyod”), which is “forward” in Russian. German socialists had already published the periodical “Vorwärts,” and the German national socialists continued the use of the slogan. Several communist and socialist parties still use “Forward” as the title of their publications.<br />
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On April 30, 2012, “Forward” became a slogan of the presidential campaign of the Democratic Party, later enhanced with an exclamation mark. An editing war erupted in Wikipedia about the socialist roots of the slogan about deleting the socialist references.<br />
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The issue here is not about any political campaign, but the social concept of “forward.” Socialism is, first of all, a family of concepts. Some socialists seek greater statism, the control of society by the state. Other seek “social democracy,” whereby people vote on the major policy options. There are also socialists who seek to put the means of production, land as well as capital goods, in the hands of worker cooperatives.<br />
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Usually the “forward” thinkers seek, if not as an ultimate goal, then as the instrumental goal, a governmental control at least of the “commanding heights” of the economy: the financial system, the highways, education, medical care, and retirement pensions. Socialists seek strong controls on the remaining private production, and they also seek an equalization of wealth through a massive redistribution, with highly progressive taxation.<br />
<br />
But the world has already experienced the results of “forward” policies in the failed economies of the old USSR, the China of the 1950s and 1960s, Cuba, North Korea, and Eastern Europe. The “forward” socialists seek a progression to the failed past. Of course they claim that their brand of socialism is different from that of the collapsed USSR, but the evidence of history reveals what was attempted in practice world-wide, even when it differs from hypothetical doctrines. <br />
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Even though American politicians who trumpet “forward” do not generally seek complete socialism, the greater interventions and state controls they do favor have been analyzed by many economists as ineffective and wasteful.<br />
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Instead of “forward,” a better metaphor may be “upwards.” Upward takes us to a higher place, and also to the origin of a flow such as a river. But how do we know which way is “up”?<br />
<br />
We need to use a “Unified Field Theory of Social Policy.” A theory of “upward” policy needs to begin with ethics. The absence of a sound ethical foundation is the key flaw in most socialist thought, most of which does not even distinguish voluntary from forced human action. The optimal direction of reform has to be away from what is morally evil. The foundation for upward progress has to be a universal ethic that expresses the rules of natural moral law.<br />
<br />
Next, a theory of upward progress requires a fundamental understanding of economic principles. The most important economic idea is precisely what is left out of almost all economics textbooks: the generation of land rent by the population, commerce, and public works of society. To that we add that land rent is based on the differing productivities of locations, and therefore that rent is an economic surplus that can be tapped for public revenue without harm to the economy; indeed the very collection of rent even enhances the economy.<br />
<br />
But it is not enough to have this economic insight. Modern political economy studies how government operates, and concludes that our systems of mass democracy will not adopt the upward reforms prescribed by ethics and economics. Mass democracy requires mass campaign funds to pay for mass media. This inherent demand induces the supply of funds by special interests in exchange for the political clout that gives them subsidies. Modern economists ironically call these privileges “rents” without being aware that the greatest of all subsidies is the implicit generation of land rent by government’s public goods. <br />
<br />
Therefore it is not enough to preach ethics and economics as though to a benevolent despot. A political movement to progress upwards needs to also include the reform from mass democracy to small-group democracy, where voting is decentralized to a human scale. Anarchists such as Bakunin have long recognized the principle of bottom-up voluntary association.<br />
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Our cultures have frequently looked up to the sky as heaven, and thought of downwards as the various versions of hell. People naturally seek to move up, and so “upwards” as a slogan would have great appeal, but it would only be worthwhile if we move up from a sound foundation.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-48659945540873421932012-10-28T07:50:00.003-07:002012-10-28T07:50:56.145-07:00Presidential Debate FantasyThe debates between the two major candidates for President of the USA have been, in my judgment, rather superficial. The candidates have dwelt on who said what and whose fault is which, rather than digging into the fundamental moral and economic issues.<br />
<br />
Here is a presidential debate fantasy on how the candidates could engage in a more basic way. Included are Green and Libertarian Party fantasy candidates, with the tax position of the Libertarians based on that of the 2012 candidate rather than the platform, since the candidate is not following is party’s free-trade platform. Also included is a fantasy candidate of the Free Earth Party.<br />
<br />
Democrat: Rich people often pay a lower income tax rate than middle income folks. The tax cuts of a decade ago favored rich people whose income comes from dividends and capital gains. To reduce the deficit and pay for medical care as well as investments in new technologies such as solar energy, we need to raise the tax rates on the rich. It won’t hurt them or the economy to pay a bit more.<br />
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Republican: High tax rates on the additional income of corporations and small business reduces investment, employment, and growth. We should eliminate many of the deductions, credits, and exemptions on higher incomes while reducing the tax rates. Economists agree that lower tax rates on a large tax base would have the supply-side effect of more investment and employment. The Democrat demand-side policy of more spending and bigger deficits has not worked.<br />
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Green: The poor should not pay any income tax. There should be high taxes on wealthy individuals and corporations. There should also be a transaction tax on trades of stocks, bonds and other financial assets, because this would reduce speculation and trading that does nothing for the economy. The rich can also be taxed more by eliminating the cap on Social Security taxes. Also impose a wealth tax on the very rich. Greens also advocate taxing pollution and land values. We also want to tax unhealthy foods.<br />
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Free Earth: It’s great that Greens favor taxes on pollution and land value. The Free Earth Party says that these should be the limit of taxation. Government should not tax the rich just because they are wealthy. What matters is the source of their wealth. Land value taxation would prevent fortunes from natural resources and community-created land value, while untaxing all labor and capital would promote maximum employment and economic growth. We get the most economic justice from sharing nature while honoring individual self-ownership.<br />
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Libertarian: All taxes on income should be abolished. Instead, there should be a national sales tax. That way, savings would not be penalized. It is OK to penalize borrowing for consumption, because that reduces excessive debt. Also, we allodial libertarians, in contrast to the minority geo-libertarians, believe that any tax on land violates private property rights. We are also not keen on taxing pollution, because we don’t think it does much harm. A sales tax is the least worst tax, because it does not tax savings, and does not violate the sacred right to own land, which is a higher right than the right to freely engage in trade. Much of sales tax revenue comes from rent or is at the expense of rent anyway, so it does tap some of the land rent, and the fact that a high national plus state sales taxes would have a lot of tax evasion does not bother us, since we don’t like paying any kind of tax.<br />
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Democrat: I will ignore the views of the Libertarians, Greens, and Free Earthers, because they are minorities who don’t matter. We Democrats support allowing the decade-ago tax cuts for the wealthiest, for those making over $250,000 per year, to expire. We want a minimum tax on the rich so that no millionaire pays a smaller share of income in taxes than do middle class families. This won’t hurt growth, because millionaires will hardly miss the money.<br />
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Free Earth: The conventional policies of both the Democrats and Republicans created the Crash of 2008, the high unemployment, and slow recovery. Only a radical tax shift, replacing taxes on wages and enterprise to taxing pollution and land value, will eliminate the subsidies that promote pollution and economic trouble. The fair tax share of the rich is the land rent they receive from government’s public goods; tax that, and not their enterprise and investment. Our economic woes come from ignoring sound economics, even if they are minority viewpoints.<br />
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Republican: The reason the minority parties are minorities is because people reject their kooky policies. Taxing land value would confiscate the value of real estate. We don’t need fancy new taxes. Just flatten and broaden the income tax.<br />
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Libertarian: But the reason the income tax has become complicated and convoluted is that special interests can lobby for tax favors. That’s why we need to replace the income tax with a flat national sales tax.<br />
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Free Earth: Libertarians need to read Professor Mason Gaffney’s writing on sales tax suicides. We favor property rights, but not subsidies. The rent generated by communities and public works is not a proper individual property right. To the creator belongs the creation, and the creations of communities belong to communities, not to conquerors and subsidy seekers.<br />
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That ends my presidential debate fantasy. Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com2tag:blogger.com,1999:blog-23062420.post-50018539445933752092012-10-21T21:13:00.002-07:002012-10-21T21:13:50.377-07:00Sardines: A Sordid StorySardines are delicious and healthy to eat, but much of the consumption of these fish is for feeding to animals, and this is destroying the wildlife of the seas. We are possibly witnessing the fulfilling of the prophetic verse in Revelation 8:9, “one third of the living creatures which were in the sea died” (World English Bible).<br />
Already several fish ecologies, such as the fish by the coast of Namibia, have collapsed. Sardines and anchovies are in some places the main prey of the predators up the food chain, including birds, seals, dolphins, and whales.<br />
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Much of the sardine catch is ground up and fed to farmed fish and factory-farmed chickens and pigs. World-wide, 14 million tons of wild fish, such as sardines and anchovies, are fed to mass-produced food animals. About 75 percent of the fishmeal and oil fed to carnivorous farmed fish come from the harvest of small, open-ocean fish such as anchovies, herring, and sardines. When you eat a farmed salmon, you indirectly eat sardines and the other fish feed.<br />
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Marine scientists in organizations such as Oceana are advocating reductions in commercial fishing for sardines and other food fish. The Institute for Ocean Conservation Science convened the Lenfest Forage Fish Task Force of thirteen preeminent fisheries scientists to develop recommendations on forage fish management. Its report recommends cutting “global fishing for crucial prey species” by half. It stated that “globally, forage fish are twice as valuable in the water as in a net.” The report, published in 2012, is called “Little Fish, Big Impact: Managing a Crucial Link in Ocean Food Webs.”<br />
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The global fishing industry is now engaged in a vicious circle of the destruction of the ocean food base. After the large fish such as tuna are depleted, fishing then goes after the smaller fish, and then the depletion of the fish at the bottom of the food chain further reduces the animals higher up the chain, which then induces a greater catch of the smaller fish. The “little fish” now amount to 37 percent, by weight, of the global fish harvest, up from 8 percent 50 years ago.<br />
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An economic analysis of using fishmeal as livestock feed includes an ethical application, since the concept of the pure market economy necessarily involves ethics. The pure market consists of voluntary human action, and the concept of voluntary action requires a universal ethic to designate acts a good, evil, and neutral. Voluntary action includes acts that are neutral and good, while involuntary acts, those that coercively harm others, are morally bad or evil, and outside the market as violations of natural moral rights.<br />
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Such ethical analysis includes the origin of property rights. Our equal self-ownership endows human beings with property rights to their own personhood as well as what they produce. But self-ownership does not extend to natural resources such as wildlife. The premise of human equality, from which natural moral law is derived, implies an equal global benefit from the surplus of natural resources such as the fish in the ocean, and equality applies also to future generations. Hence, natural moral law requires a sustainable harvest from the seas. One cannot logically blame a non-existing “free market” for the depletion of the world’s fish. The fishers do not have a morally justified property right to the ocean’s wildlife.<br />
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The efficient and equitable way to harvest the global fish stock is to set a quantity limit to the catch of each animal type and location, and then let fishers bid in auctions for portions of the catch. The funds from the auctions would be economic rent that should be devoted to research, monitoring, and enforcement of the catch quotas. Market demand would then allocate the fish to the most wanted uses. The limitation of the fish catch, such as half the current amount, would raise the price of sardines and other such fish, and would most probably greatly reduce the use of sardines for fishmeal for livestock. The industry would find substitutes, or reduce the amount of livestock as the feed price rises.<br />
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A sustainable harvest of oceanic fish requires an international agreement. Such treaties have been difficult to establish and enforce. Those governments which are more responsible and seek such agreement could implement the treaty, and then impose penalties on the countries that refuse to cooperate.<br />
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At any rate, there should be more popular awareness of the fish depletion problem, before Revelation 8:9 becomes reality.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-56321412605591991892012-09-30T09:15:00.001-07:002012-09-30T09:15:54.821-07:00Real Estate Forecasts 2012 - 2026The fundamental cause of the boom-bust “business” cycle is the real estate cycle. The period of the real estate cycle has averaged 18 years. Since the previous peak in real estate in the USA was in 2006, the next peak, if the 18 year average holds, will be in 2024. The next depression would then follow soon after, most likely in 2026, 18 years after the Depression of 2008.<br />
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Many real estate economists have analyzed the current data to conclude that the real estate cycle has already bottomed out. Inman News on 20 September 2012 announced, “Economists bullish on housing recovery.” <br />
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In a survey conducted by Pulsenomics LLC for the real-estate information company Zillow, the conclusion of 113 experts was that residential real estate prices, as measured by the S&P/Case-Shiller U.S. National Home Price Index, will rise steadily during the next few years. That Index has already risen 1.2 percent from the second quarter of 2011 to 2012. The September 2012 Zillow Home Price Expectation Survey average forecasts a price increase of 15 percent by 2016.<br />
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Zillow and Pulsenomics also announced the Zillow Home Price Expectation Survey 2010-2011 Crystal Ball Awards, but they have no award for long-term forecasts, i.e. for the next peak and crash.<br />
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Economic investment, meaning an increase in capital goods, drives the boom-bust cycle, and the most important investment is real estate construction, because buildings induce also more investment in durables (furniture, appliances, and fixtures) and also more production of materials such as wood, cement, and copper for wiring. When construction revives, investment will rise, unemployment will fall, and the next unsustainable boom will be underway.<br />
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The survey also shows that real estate experts understand the negative effects of governmental subsidies. Most of them believe the economy would benefit from the elimination of the mortgage interest deduction from income taxes.<br />
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Indeed, subsidies to real estate are the fundamental cause of artificial real estate booms. Since subsidies (rather than business as such) drive the cycle, it is better called the “interventionist cycle.” There are three basic subsidies to real estate: low interest rates, special tax reductions, and the generation of rent by government’s territorial goods. <br />
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The Federal Reserve has pushed nominal short-term interest rates down to almost zero, and has been keeping long-term rates low as it buys bonds with newly created money. The tax reductions for real estate continue as before: deductions for mortgage interest, property taxes, and depreciation; and exemptions and postponements of capital gains taxes. The biggest subsidy is implicit: the generation of land rent and land value by government’s public goods, paid for by taxing workers and entrepreneurs instead of land. <br />
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This gigantic redistribution of income from workers to landowners is the fundamental source of our economic woes, but it is hushed up in economic textbooks, and nobody talks about it or thinks about it. (“Nobody” here means “only the followers of the economist Henry George,” because to the public, they are nobodies.) <br />
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Politicians aware of this redistributive cause of economic problems dare not mention it, lest they lose their campaign contributions from real estate, financial, and lawyer interest groups. Even labor union leaders dare not speak of this redistribution, because if workers could keep their full wage, they would no longer anxiously seek to maintain labor union monopolies. And even the candidates of the “free market” Libertarian Party support the land-value subsidy and redistribution, because rent seekers are a major source of their campaign funds. <br />
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Thus political corruption, endemic in mass democracy, prevents the remedy from even being discussed. Georgists or geoists do talk about it, but they scare off potential allies with their misleading rhetoric of opposing the “private ownership of land,” instead of focusing on the force of governmental subsidies. Geoists do favor the private possession of land, conditional on paying a community rent.<br />
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At any rate, since “nobody” is even discussing the remedy for the boom and bust sequence, the good news is that real estate shall rise again, and pull up the economy into the next boom, but the bad news is that once again, the economy will crash. All the financial regulations and reforms will not prevent the next crisis, because they do not touch the fundamental cause, subsidy. <br />
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And most probably, the Crash of 2026 will be much worse than the Crash of 2008, because after the trillion dollar annual deficits, in the next crisis, the US federal government will be all tapped out, as it will no longer be able to pay the debt service, and it will no longer be able to borrow funds to bail out the real estate and financial industries, or homeowners. But you, dear reader, have time to prepare and brace yourself for the waterfall up ahead.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com3tag:blogger.com,1999:blog-23062420.post-22696405120398740272012-09-23T09:13:00.001-07:002012-09-23T09:13:24.814-07:00Government's War on SharingThere is a fuzzy border between trading and sharing. Suppose Adam gathers apples and Eve gathers oranges. The each want some of the other, so they can either trade some of the fruits, or they can share them. The result is the same: they each eat some of both.<br />
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Sharing implies that one gives the other some of the goods, and the other gives some to you, but reciprocal sharing is about the same as trading, perhaps though with a psychological difference.<br />
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Now comes the income tax to turn the beautiful act of sharing into a taxable commercial transaction. To the government, barter is just as much income as selling for cash. If you trade an apple for an orange, it has the same economic effect as selling the apple for cash, and then using the cash to buy the orange from your trading partner. The person trading his apple is subject to the same tax as the one selling for cash. <br />
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But since sharing has the same economic effect as trading, sharing too might fall under the tax code. This is what people are finding out when they share apartments.<br />
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In San Francisco, California, as in some other cities, there is a hotel tax, officially called the Transient Occupancy Tax. If you have guests stay in your apartment, you must pay a 14 percent occupancy tax to the city. <br />
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Many city residents have been using web-based services that find tenants for short-term stays. The guest benefits by paying less than he would for a hotel, and also by being able to stay in locations in which there are no hotels. The resident gets some income during the time he goes on vacation or stays elsewhere. There are also organizations that provide for car sharing, or short-term car use. Such services have been called a “sharing economy.” But the sharing is subject to income taxes, as well as special taxes such as the hotel tax.<br />
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Other problems arise from tenant’s rentals. In San Francisco, for example, it is illegal to sublet an apartment for more than is paid in rental to the landlord. The rationale is that when apartments are subject to rental controls, tenants can exploit their subsidized unit by subletting, in effect getting some of the economic rent. Also, some landlords could circumvent rent control with phony subletting. <br />
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The problem with subletting is the rent control itself. What is being controlled is not the economic rent, but who receives it. If the landlord is not allowed to collect it, then in effect the tenant is obtaining the rent implicitly, as a benefit. Properly, the people should be receiving the economic land rent in equal shares, and restrictions on development should be eliminated, to allow the quantity of housing units to match the quantity demanded.<br />
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The issue of taxing barter is inherent in income taxation. Barter is economically similar to using money as a medium of exchange. Sharing does provide net gains, and if gains are to be taxed, then if sharing is not taxed, that offers a way to avoid paying the income tax. The dentist will share dental services with members of a sharing economy, and they will share the food they produce with the dentist, and so there is no income tax, but indeed the income is there. Production is income.<br />
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The basic problem is the taxation of activities. A tax on the activity of production or consumption stifles the activity, which is the purpose of the economy and of living. To live is to consume. To tax consumption is to tax life, and to consume we must produce, so to tax production is also to tax the creation of life.<br />
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We can avoid taxing life if we tax the surplus from production that goes to land rent, because the landowner has not produced anything in return. If the landowner keeps the rent surplus, he gets a subsidy. The problem is not just the inequity of society’s surplus going to land title holders, but that the surplus creates a land value that rises with economic expansion. Speculators then jump in to capture the rising land value, and that carries real estate prices beyond what people who want to use it can afford, and then we get a recession like the Crash of 2008.<br />
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A tapping of land rent for public revenue is not based on any activity. The tapping does not depend on what the landowner does. He can hold vacant land and pay the same community rent as his neighbor who has a tall apartment building. A single tax on land value would avoid a special tax on occupancy. The abolition of taxes on income, other than land rent, would let people share as much as they wish, tax-free. And with no taxes on gains other than from land, there would be no tax evasion, and most folks would trade for money, since money evolved to facilitate trade. A lot of the “sharing” comes from the desire to escape taxes. <br />
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With a single tax on land value, sharing would be authentic. So the presence of the income tax pollutes genuine sharing. The replacement of hotel taxes with public revenue from land rent would promote a fuller use of real estate. Government’s “War on Sharing” destroys community spirit along with productive activity.Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0tag:blogger.com,1999:blog-23062420.post-68538693373290058112012-09-09T11:40:00.002-07:002012-09-09T11:41:37.821-07:00Ex Post Facto TaxationAn ex post facto law takes effect in the past, before it was enacted. Suppose on September 3, 2012, a law takes effect banning smoking as of January 1, 2012. Someone who smoked in January 2012 would be penalized, even though smoking was legal in that month. The U.S. Constitution recognizes, in Article I, section 9, that such ex post facto laws are unjust. <br />
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Amnesty laws are also retroactive. When a law is passed decriminalizing acts committed in the past, these are ex post facto, but they benefit those affected, and so these are equitable. The amnesty law says that the previous law is changed and will no longer be enforced, so the action is forgiven. <br />
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When taxes change, they too must not apply greater tax rates for past events. If taxes go up, the higher rates should apply only to future actions, and when tax rates go down, transactions in the past must still get taxed at the rates then in effect, unless there is a tax amnesty.<br />
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The U.S. Commerce Department has now imposed an ex post facto tax of about $100 million. Higher tax rates, ranging from 31 to 250 percent, have been imposed on the solar cells made in China. The reason for the higher tariff on the panels, bought up to 90 days prior to the imposition of the higher tax, is anti-dumping legislation. The U.S. companies affected include many small businesses, the type that do the most to increase employment. Some of the companies were exporting low-cost solar energy products to rural areas in foreign countries. The higher tariffs also contradict the alleged policy of the government to promote the use of solar energy.<br />
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The Commerce Department responded to some companies that make solar panels. These firms claim that Chinese producers are getting subsidies that enable them to sell their goods below the costs of production. I will not analyze the anti-dumping legislation itself, but only the retroactive aspect of the imposition of tariffs.<br />
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Entrepreneurs make decisions based on marginal analysis. They calculate the marginal cost, the cost of producing extra amounts, based on the costs of buying more inputs. They calculate the marginal revenues, the income from selling extra units of output. To maximize profit, they produce more if the marginal revenue is greater than the marginal cost, and produce less if the marginal cost is greater than marginal revenue.<br />
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The firms purchased the Chinese panels given the cost, including taxes, at the time. Then they get slapped with a higher tax on the past purchase. When the decision would have been to avoid purchasing the panel, given the higher tax, the ex post facto tax destroys the firm’s economic calculation. The result is not just less profit for the firm, but greater waste and inefficiency for the economy. The ex post facto tax prevents resources from being allocated to their most productive and benefits-maximizing uses.<br />
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There have been previous similar retroactive import taxes. These ex post facto taxes violate the prohibition of ex post facto laws by the U.S. Constitution, but the courts have historically been very lenient on the Constitutionality of federal taxation. In 1994, in United States v. Carlton, the U.S. Supreme Court held that retroactive tax laws were Constitutional. The rot had started much earlier, in 1798, when the Supreme Court, in Calder v. Bull, illogically held that the prohibition against ex post facto laws applied only to criminal laws.<br />
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Logically, the reverse should be the case. The ex post facto prohibition should apply to civil cases, but not to criminal law when the crime was evil under natural law. Thus if it was legal to murder particular types of people in the past, then a law recognizing that such murder was evil and should be illegal would be proper, especially when the Constitution already recognizes the existence of natural law and natural rights. Thus also, slaves may be set free even if the slaves were legally the property of the owner in the past. But it is not immoral to import goods; indeed, the tariff itself violates the natural right to freely trade.<br />
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Ex post facto taxation is an assault on property rights. Nobody’s property is safe if government can confiscate it due to actions that were legal at the time, but later become illegal. Ex post facto laws also destroy the concept of the rule of law. Under the rule of law, people are supposed to know the current laws, and base their actions on such laws. But if laws change, not only do people have to alter their future acts, but they cannot know if their current acts will get slapped by a higher penalty than that set by current law. The regime becomes a rule by chiefs who arbitrarily impose costs rather than rules that apply to all at the current time.<br />
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The U.S. Constitution clearly and simply states, “No Bill of Attainder or ex post facto Law shall be passed.” What part of “no” do the Justices not understand?Fred Foldvaryhttp://www.blogger.com/profile/00271451913338000071noreply@blogger.com0