November 9, 2009

Imperfect Information Undermines “Free-market” Economies

Posted in economic recovery, media coverage, Obama administration, taxes, U.S. Economy tagged , , , , at 8:09 pm by realitytax

It’s no secret that a variety of interested parties exert influence over both economic policies and the general understanding (and reporting) of the effects of changes, just as they do in energy, health care, education, the financial sector, and/or anything else that the Congress or various federal agencies have a role in shaping. Misinformation can lead a seemingly honest, open debate far afield from reality, inhibiting the efficiency of the process while at the same time warping the outcome.

If you don’t understand fiduciary relationships, and you still think most corporate actions reflect the same sort of priorities that pertain when a truly small business is owned by a single person, or a couple, you’re missing a key factor. Shareholders, for instance, seldom have any significant influence on the pay (or bonuses) of officers engaged in potentially risky decisions at major corporations – auto manufacturers, for instance, or the financial institutions that crumbled on Wall Street as the financial crisis became obvious to virtually everybody at home and abroad near the end of the Bush administration, when we ended up dumping billions of dollars into banks without any obvious benefit (it certainly didn’t stimulate consumer lending, as both Bush and early Obama administration initiatives were intended to do.)

In fact, if you look closely, the problem of banks that are “too big to fail” is getting worse, not better, due to consolidation. But that’s not what they tell Congress or the media; the bankers speak instead of “economies of scale” to justify even further growth. Banks are tied to the model that’s ruled economic policy for decades: debt-fueled consumer spending.

Those who talk about concerns over finite resources, such as clean water, are scoffed at, and the countering rhetoric lumps them in with “climate alarmists” and “tree huggers” in such a way that genuine free market forces are not even close to determining the value of any natural resource that cannot be mined – with the curious exception that there are some cities who have privatized their formerly municipally controlled water systems, which does begin to result in a certain market value being placed on that particular resource. Of course, once a profit motive starts driving the price up, citizens in the U.S. and abroad often agitate to re-socialize their water supplies, in an era when “socializing” is used by some to imply everything that went wrong with every non-U.S. form of government.

Similarly there’s an obvious bias in the talk about income tax cuts – it generally originates from those who are well to do, and stirs the emotions of those who have much less, but more importantly if one looks closely at the data, there’s been a strong correlation in the past between those with wealth and those whose tax rates truly go down under most of the recent approaches. Would tax cuts stimulate the economy? Assuredly so – but in what way? A tax cut on income doesn’t have the same effect as, say, a tax cut (or tax credit/investment credit) for spending consistent with our national priorities, such as alternative energy sources, or research and education, etc. Such selective, targeted changes spur spending in specific areas — a very straightforward function of supply and demand, and the result is tangible — money flows to those areas, stimulating job growth and additional investment without any necessary growth of the government (growth which makes most of us justifiably cautious in the wake of the Bush administration’s under-reported increases.)

The reason that governments trying socialism, such as the USSR, to manage resources and markets for the good of the people have consistently floundered and failed is that they don’t — and can’t — have good enough centralized information to succeed making the rapid decisions necessary to control what is arguably the most intricate challenge of any “man-made” system, the decentralized activity of a vibrant, balanced economy. Markets are efficient at managing that information; but we’ve seen a dramatic example of why they cannot be expected to function for the good of the consumers when government fails to regulate those with the profit motives.

Consumers, too, need access to better information than they typically get under the current system, no matter if you’re considering tax-cuts, politics, the price of peanut butter, new home-buyer credits, or anything else. When misinformation is tolerated (or encouraged) it undermines the effectiveness of capitalism. Free markets rely on timely, accurate information – we need to consider new incentives for the reporting of “news” and information systems we base our choices on, or capitalism is absolutely doomed to implode.

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February 22, 2009

Economic Recovery: Facts for D.C. to factor in

Posted in foreclosure crisis, health care, mortgage reform, taxes, U.S. Economy tagged , , , , , , , , , , , , , , at 5:24 pm by realitytax

MinnesotaWhen Congress and the President are working on the budget, they have a perfect case study for the “no new taxes” approach right here in Minnesota: we elected a rising star of the Republican party to be our Governor in 2002 on that pledge, Timothy J. “Tim” Pawlenty. Tim PawlentyNow in his second term, Governor Pawlenty won the office promising to balance the state budget at a time when Minnesotans were tired of the way politics had played out in the state capitol while Jesse”The Body” Ventura as Governor, and according to Wikipedia, Pawlenty attacked a deficit of  roughly “$4.3 billion without raising taxes, primarily by reducing the rate of funding increases for state services, including funding for transportation, social services, and welfare.

“New fees aren’t taxes”

If not for the fact that the tourism industry in the state took a big hit in 2005 due to a government shutdown and closure of highway rest areas, state parks and so on, we might have been ok with the winking at that pledge and calling some things new “fees” instead of taxes (heck, it was only $300 million or so,)double digit tuition increases at MN colleges as Governor slashes education spending and major increases in tuition at the state colleges and universities, or cuts in areas such as school spending — until we realized there was no longer a band playing at the high school events.  And in places where they value music, such as Fergus Falls, the communities and booster clubs can find local funding to keep band directors such as Scott Kummrow employed, right?

We needed the revenue, clearly, and the Governor didn’t raise taxes – although local jurisdictions had to fill the gaps as the money from the state dried up, but that’s another story. By the way, adding toll lanes to busy commuter routes isn’t a new tax, either. I have some question about how to label the bond bill the governor signed last year, but he vetoed some line items so maybe we can say he somewhat limited tax increases in the future?

But lets not quibble about fees and bonding, let’s talk about the Minnesota economy and budget – that’s the point.  Sure, we might have put thousands of Minnesotans to work if the bond bill had included funding for light rail connections between Minneapolis and St. Paul, and that probably would have stimulated business and tourism in those areas, but it would have made the bonding bill even larger and somebody would have had to pay and the delay only adds maybe $40 million to the cost – later, when he’s no longer the Governor. And now our budget deficit in probably only $7-$8 billion.

No New Taxes

In Minnesota trying to generalize that taxes were problematic by definition glossed over that the government runs on money: funding for nursing homes, teachers, and education was slashed, for example, and the costs passed on to local communities to “balance the budget.” The state budget deficit is now conservatively projected at double what it was when Pawlenty took office, while sales tax revenues fall and companies slash payrolls driving people onto unemployment rolls (placing their health care coverage at risk and further reducing consumer spending.) At least LA Governor JindalPawlenty isn’t posturing for the pundits as Louisiana Governor Piyush “Bobby” Jindal and a few others are by suggesting we won’t take “stimulus” money from the federal government –  He’s saying Minnesota government needs cash.

We borrow to buy homes, cars, and even smaller items that fit on our credit cards. We continually pay interest to some of the same companies that needed bailing out on Wall Street, while one group of people benefits: the rich. They don’t worry about the price of cheese, cars, or college.

History doesn’t support trickle-down theory.

our economy has only grown when taxes are high - corporations always find ways to hide their revenue from the tax man.For the common good it’s time we admit that when you cut taxes for the rich they mostly they stash more money into their nest egg(s) so they can retire early, live comfortably, eat cake, and travel the world. Meanwhile the rest of us watch our food budget, some see the investment in their homes plummet, and if we have put money aside we watch what remains of it shrinking in our privatized retirement accounts.

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