Archive for May, 2009

Promise from a Rose Garden

May 21, 2009

“The fact is, everyone wins,” Obama said during a Rose Garden ceremony

How stupid was it not to elect an expert like this before. There would have never been an economic crisis. Auto industry would have flourished. The minds of executives, economists and engineers of the whole world auto industry were not able to achieve what (yes) he can:

“Consumers pay less for fuel, which means less money going overseas and more money to save or spend here at home. The economy as a whole runs more efficiently by using less oil and producing less pollution,” he said. “And companies like those here today have new incentives to create the technologies and the jobs that will provide smarter ways to power our vehicles.”

It’s so simple – economics 101.

For the record here, so he can’t say down the road, “I never promised you a rose garden.”

Change Daily? Yes We Can.

May 21, 2009

I want to ask you an intimate question: Where was your underwear made?

One of the punch lines for “fair tax” is that it will lower the prices drastically. But is it really so?

It just occurred to me this morning, while dressing, to look at what am I wearing. More specifically, where is it made. Underpants – India, jeans – Mexico, shirt – Haiti (imported via Mexico), shoes – China. Luckily, weather is warm so I don’t need sweater and coat. Also, socks had no tag, which made my day and gave me a little bit of (likely false) hope.

What has happened over the last decade is we have exported our production facilities, alongside with our monetary inflation. We have imported a lot of junk – big-screen TVs, iPods, toys, … borrowing a lot of money in the process, privately and publicly. Not good. Peter Schiff explains:

“Trade deficits are OK under certain circumstance. 1. An emerging nation imports capital goods necessary to enhance its productivity. 2. A developed nation, with a current account surplus, uses some of its investment income to finance the purchases of additional consumer goods from abroad.

While it’s true that removing corporate taxes would stimulate the production in the right direction, such process takes significant time and is not at all likely to have predicted impact in the highly toxic and chaotic financial environment. In the meantime, how is sales tax going to make foreign-made goods and domestic services cheaper, remains to be seen.

I’d like to hear from folks who, while reading this, identify a piece of clothes Made in U.S.A. on them. Let us know the brand of the patriotic company.

The Fairy Tax

May 20, 2009

“It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.”

Ludwig von Mises, “The Theory of Money and Credit

In principle, I like the so called “Fair Tax” proposal. I say “in principle”, because I think it is really a good idea to pull the taxing on the edge of the economy – it creates a cleaner interface, thus greatly simplifying the whole process. I say “so called” because it is not fair, but more about it later. The visible taxing is but one of the burdens on the economy. Even in a “sales tax only” world, the government fingers are still in the economic pot and there are many other issues that are much more urgent as well as dangers associated with enacting another tax without making 100% sure it is a replacement rather than addition. So, buckle down, here we go …

According to the Fair Tax website, the fair tax is

“a comprehensive proposal that replaces all federal income and payroll based taxes”.

Additionally, it promises to do away with the much dreaded IRS. The rationale, in a nutshell, is that businesses will be relieved from the tax burden, everyone will pay the same amount and economy shall tremendously prosper as a result. If it were so simple to fix our economic woes, I wonder why did we not do it already? Methinks there is something seriously flawed in both the plan and its timing. Not that it does not have valid points – it does, many. There are indeed measures in there that would have stimulative effects on the economy. But there’s much, much more to it then just simplifying the way we pay taxes and – poof – we find ourselves in a paradise literally overnight. For, that is precisely what the fair tax proponents like Neal Boortz promise.

For starters, there is absolutely nothing in the legislation proposal that addresses the main ill that affects the economy most and has to be dealt with first – the central planning embodied in the lethal combination of Federal Reserve System, fiat-money, fractional-reserve banking and their corollary – the rapidly growing federal deficit-spending machine. Any reform that does not address those issues is merely a band-aid on a cancer. The fair tax proponents are surprisingly honest about it:

“We are not calling for elimination of federal taxation, which would be irresponsible and undesirable.

This would imply that, until 1913, this nation was irresponsible and has lived in undesirable way. The conspiracy-theory-borderline conclusion whether the 16th ammendment only accidentaly coincides with the Federal Reserve Act is left as an exercise to the reader. But, wait, there’s more – the real trouble with the mindset behind the “fair” tax is succintly expresed in the following sentence:

“Nor does our endorsement call for reduced federal spending.

With all due respect, I can not but wonder whether these people are aware of the grim reality of U.S. debt. And, with more due respect, I wonder if they are aware of the fact that some of their colleagues have a very different opinion on the subject.

Furthermore, while the current tax code indeed harms the business efficiency, it is by no means the only obstacle. The main obstacle is the aforementioned rigged financial system and acompanying forrest of regulations. But Fed is not the only culpit – there’s FDIC, EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, OSHA, CPSC, NHTSA, EEOC, BATF … and the obstacles those agencies impose on the businesses.

Futhermore, it is troubling that the H.R. 25 states (SEC. 2 CONGRESIONAL FINDINGS.):

“Findings Relating to Repeal of Present Federal Tax System- Congress further finds that the 16th amendment to the United States Constitution should be repealed.

The term “should” is obviously weak language and by no means a guarantee that this shall happen. Repealing a constitutional amendment is a long process and H.R. 25 provides no guarantees thereof – only suggests that it should happen. That being said – how likely is it that we end up with both income and sales tax which later, as entitlement programs sink deeper and deeper into financial troubles and U.S.A. drifts ever closer to the European social democratic model, morphs into a full-blown VAT? Even the fair tax proponents admit that there is no guarantee on that. They just hope that things would be so good that additional taxes would not have to be imposed.

But even if one disregards all the mentioned shortcomings that would prevent the realization of the paradise promised by the fair taxers, at it’s very bottom, the fair tax is not fair – it comes with income redistribution as a built-in feature. Yes, the people who receive money without doing any work in return will still be with us. Since subsidies always create more of the subsidized activity, we can expect the number of recipients in this category to keep growing. But, even when I chew up on that one, I stumble over the percentage controversy. Call me paranoid, but if it’s all the same tomato, is it really only by accident that we are served a perception of the smaller one?

Last but not least, what we call taxes (all of them – federal, state, excise, property, …) is by no means a whole picture. Inflation is taxation. So is deficit spending.

Admittedly, it’s easy to be a critic. Some smart people thought hard and long, money was spent, efforts expended and trashing it all without a counter proposal would be irresponsible. So, I propose the following course of action:

  • Pass H.R. 1207 (Federal Reserve Transparency Act of 2009). That will give us some grounds to discuss whether central banking is good or not for our economy. I suspect it will provide a lot of reasons to abolish it.
  • Abolish the Federal Reserve. For those who think this is radical and impossible, I submit the fact that it was done twice before in the U.S history (hint: check that $20 bill face bio).
  • Establish sound money. Since only God can make it, deficit spending is automatically taken care of. This, in turn, automatically shrinks the governement.
  • Establish 100% reserve banking.
  • Reform the taxes.

I have only touched on the most troubling aspects of the so called “fair” tax. It’s nickname is misguiding and the proposal aims at the right target in a wrong way and prematurely. The authors have fallen into the common economic fallacy trap – not thinking it all the way through.

“Economics is haunted by more fallacies than any other study known to man. This is no accident. … The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Henry Hazlitt, “Economics in One Lesson

With some modifications, H.R.25 would be a worthwhile effort in an economic environment that operates on a solid foundation of free market, sound money and balanced governement budgets. In the reality of our current state of the economic affairs, I hate to say it, but it’s a fairy tale.

Thus Spoke Mhlakaza

May 13, 2009

David Deming compares Xhosa cattle-killing movement with the contemporary green movement spearheaded by Nobel laureate Al Gore. To achieve his fifteen-year-old niece’s vision, the movement leader Mhlakaza fanatically urges Xhosa people to kill all their cattle and destroy all life-sustaining tools. The reason? Heaven on Earth that will allegedly ensue once all the life-sustaining substance is destroyed. The campaign ultimately causes the population to starve, majority dying out and the rest falling easy prey to colonizers. We may laugh today at Xhosa’s naivete, but we are not much smarter at all, it’s just that somewhat more sofisticated techniques have to be used in order to mislead us. There are ominous parallels in our age, aimed at progress prevention and not limited to green movement only.

The modern cattle-killing attack is two pronged:

  • Wealth-producing is bad for the environment.
  • Free-market is blamed for economic downturns.

Both of the above points turn the reality upside-down while prescribing cures damaging to the wealth creation. How so? The first one by characterizing things that are most likely occuring naturally to be man-made. The second works toward the same goal by doing the exact opposite – by characterizing man-made effects to have natural causes without scientific explanation. Additionally, their proponents proclaim, in both cases the “debate is over” and “there is no disagreement”. In both cases, naturally, government has all the right answers – all we have to do is follow the instructions. The verdicts are repeatedly and one-sidedly rendered and served to the public.

As it turns out, the reality is quite the opposite from the usual serving that public gets from the mainstream media. No, the debate is not over (not convincing enough? check this) and yes, there is disagreement. With all due respect to Gore’s and Krugman‘s Nobel Prizes, Friedrich A. Hayek and many signees of the above mentioned petitions have those, too.

How does this illusion of passing half-baked semi-truths as “done deals” work? Hayek elaborated on it in the “Intellectuals and Socialism” essay. Ayn Rand described it perfectly well in the character of Ellsworth Toohey.

There is plenty of proof that free market capitalist principles have contributed to our well-being whenever government chose to stay out of the economic recovery business, while massive government interventions have obstructed it. Should we be responsible stewards of our environment? Absolutely. Do we deserve protection from violence and fraud? No doubt. Should we start regressing in hope to prevent icecaps melting? Not at all. Earth came out of ice age without anyone burning coal or gas. Ergo: global warming happens. It may have to do with Sun activity. It may have to do with many things and we simply do not know for sure yet. Is the free market to blame for the current economic difficulties? There is no free market.

Yet, the followers of the J.M. Keynes’ economic doctrine, much like the Xhosa prophet Mhlakaza keep on telling us to do things that absolutely make no sense: market must be constantly tinkered with through regulation; the way out of debt is more debt; the remedy for regulation-caused crisis is more regulation. Naturally, the prescriptions do not work, they actually make things worse. They make things worse for very same reasons that Mhlakaza’s prescription made things worse: destroying wealth-creation means causes economic deterioration. Instead of using common sense and reversing the harmful process, we are told it’s worse because we did not spend and regulate enough. In other words, we did not destroy enough wealth-creation means.

Just like Mhlakaza spoke.

As Ludwig von Mises wrote in “Socialism“:

“No one can find a safe way out for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result.

Wake up America – persisting on the current course inevitably leads to the Xhosa-like destiny.