"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Friday, October 21, 2011

9-9-9, Peter Schiff, and Bob Wenzel.

There's been a lot of back and forth about Herman Cain's 9-9-9 plan over at the mises.org forums, at Bob Wenzel's blog, on Peter's radio show and other places. It's all deep stuff, if theoretical [cause Cain won't get elected, and if elected will not set up his 9-9-9 program], so here is Smiling Dave to lay it all out.

Just a note before we begin. If you don't even know how to find the source for the stuff I will attribute to the various people, then this whole thing is way over your head anyway. That is my excuse for not linking to everything.
[Second note: Had to rewrite parts of this, after JJ over at mises.org made some trenchant comments].

First, here are the points everyone agrees on:

1. The scheme will will not reduce the amount of taxes actually being collected. Cain said this himself, in Orwellian language, of course.

2. A much bigger problem than how the taxes get divvied up is the total amount of taxes being collected. If we think of the economy  as a human being, and the govt as a vampire, what counts is not so much whether the vampire bites one in the arm or the leg, but how much blood he sucks out. The govt is collecting way too much money for a healthy economy [without even entering into moral considerations]. Cain's 9-9-9 scheme ignores this vital question completely.

3. Cain's scheme is not a triple 9, but a quadruple 9, because there is a hidden payroll tax he is trying to pretend isn't there. Peter has gone into the details in his articles.

4. The scheme is not ideal by any means. The topic of discussion is merely whether it is an improvement, however slight, over the train wreck we have now.

5. The scheme will, to some extent, replace part of the income tax with a new sales tax, at least on paper. More on this in what follows.

OK, now for things they disagree on.

1. Peter argued that a sales tax is better than an income tax because that means if you don't spend, but save or invest, you won't get taxed. And what our mess of an economy needs is to increase production, which happens if there is saving and investment. Thus, the 9-9-9 scheme is giving an incentive to people to do the right thing, meaning save their money.

Bob Wenzel quoted Rothbard at length, who argued that every sales tax is really an income tax, because the business will not be able to pass on the tax to the consumers, since the consumer has only so much money, but will have to go to his landlord and his workers and tell them he cannot afford to pay them what he used to, because his profits are less due to the sales tax. [This is in keeping with Rothbard's thesis, which sounds reasonable to me, that it's not the costs of production that determine the final price of the good, but vice versa. But this is getting off our main topic].

In other words, the sales tax will "turn into" an income tax, meaning the money to pay the tax will really come out of the income the workers and landlords were going to have.

Note that Wenzel is not saying that the 9-9-9 scheme is worse than what we have now [by this reasoning], only that it is not an improvement.

Well, did Peter have a reply? I don't think so. Both sides seemed to understand that the reasoning is too subtle to get across in a sound byte. Indeed, there was a lot of confusion, both sides not really understanding each other for a while.

Wenzel said he would post Rothbard's argument in writing and at length over at economicpolicyjournal.com, which he did. Peter said he'd try and take a look.

I think Wenzel wins this round, at least till we hear a rebuttal from Peter.

2. Peter argued that Cain's plan has a huge advantage if carried to its furthest conclusion.

The thing, is if we get rid of the income tax totally and replace it with a sales tax only, even if there is no decrease in the amount taxed, and even if we concede that every sales tax wounds up being an income tax in the sense Rothbard argued above, it would still be great for the economy. The reason? Much less red tape. As it stands now, billions of dollars and and untold amounts of time get wasted filling out those tax forms, and of course keeping the records needed to fill them out.  So we save a lot of money, and thus improve the economy, right there.

In addition, lawyers, accountants, tax preparers, and tax collectors, all gobble up a lot of money from businesses and individuals, with nothing produced. Those are all parasitic jobs that would be eliminated and the job holders sent off to do something productive. The economy benefits from that, as well.

Bob did not reply, because he was discussing the 9-9-9 system as Cain wants it, which preserves an income tax and adds a sales tax.

So I see this round as a tie.

Bottom line: As it stands now, Wenzel wins his point that in theory every sales tax winds up being an income tax, because of Rothbard's argument.

But Peter came up with a surprise argument that in practice switching to a sales tax [completely] could save us all a lot of money, even if the amount of taxes collected was the same. Of course this applies to eliminating the current system as well as 9-9-9.

A footnote: Wenzel links to Bob Murphy's piece, which he admits was written in haste. I think he did not remember Rothbard's argument correctly, because he seems to present something that Wenzel showed to be unrelated to the topic at hand.

Tuesday, October 11, 2011

UnAmerican ESPN [and Fox] Writings, the NBA, Lockouts and Bailouts.

There is a new fiction going round at ESPN [and Fox], a very unAmerican one, that the NBA owners want the players to bail them out. And that by asking the players to take a pay cut, they are "overreacting" by "pillaging" the players.

J. A. Adande writes, "It was always about people saving themselves: owners asking the players to bail them out of bad business moves..."

Bill Simmons writes, "The owners need to realize that, instead of overreacting by pillaging the players, they should be working with them while also creating a smarter business model."

Jason Whitlock [who contributes to ESPN, but wrote this on Fox] writes, "Rather than accept and deal with their culpability for its financial mess and look within for solutions — as its conservative philosophy dictates — NBA ownership has simply proposed sticking its hands in the players’ pockets for a seven-percent/$400-million kickback/bailout."

Jeff MacGregor of ESPN, in particular, gets very passionate about this.
Talking about the NBA bargaining, he writes:

Because between the lines of all this basketball madness is just another example of the nitwit super rich expecting their employees and/or the government and/or the general public to bail them out.
Save us from ourselves! they cry. Save us from our cartoon greed and our lurid excesses!
These credit derivatives are a win-win-win right down the line!
These credit default swaps are in no way a ticking time bomb!
This Eddy Curry contract will never blow up in my face!

Is he right to call the owners foolish for giving Eddy Curry a fat contract?


Is he right to compare the NBA owners to those who want bailouts from the govt and the general public?

Nope. They aren't asking for bailouts at all.

Is he right in saying that expecting the employees to take a pay cut is the same thing as asking for a govt bailout? After all, it's asking somebody else to foot the bill for your mistakes, right?

Nope. And right here is why Adande and MacGregor are sportswriters, not economists. They don't grasp the simple distinction between taking money and giving money.

Let us consider the case of Joe Sportsfan. For the last few years he has been buying season tickets for his favorite teams. But this year, due to totally foolish business decisions on his part, he is broke. As a result, he decides not to buy season tickets anymore.

Instantly, a sportswriter writes a passionate article attacking Joe Sportsfan. Why should the local team suffer just because Joe is a fool? Is it their job to save Joe from himself? Why does Joe expect a bailout from his favorite team? If Joe was stupid enough to go broke through his own fault, why does he expect the team to bail him out? If he had any sense of decency, Joe would keep on buying season tickets, whether he can afford them or not, whether he had the money or not.

I hope everyone realizes how ridiculous such an article would sound. Joe is not taking money from anyone. He is not asking for bailouts from anyone, and he's not getting any. He is just not giving the team money anymore. His money. Not the team's money, not Jeff MacGregor's money. It's Joe's money, to do with as he pleases. If, for any reason whatsoever, he decides not to spend it buying tickets, that is his own affair.

And guess what? The exact same thing is true of the owner of the team. By deciding not to give his money to the players this year, he is not taking money from anyone. He is not asking for bailouts from anyone. He is just not giving away money anymore. His money. Not the team's money, not Jeff MacGregor's money. It's the owner's money, to do with as he pleases. If, for any reason whatsoever, he decides not to spend it hiring basketball players, that is his own affair.

And it's incredible gall on Jeff MacGregor's part to presume to tell other people what to do with their money.

Guys, that's not what America is about. It's what Soviet Russia was about. And you know what happened to them.

Reading through articles about the NBA lockout, I get the impression that the writers think the owners and/or the players owe the fans something; that since the owners are all rich, they should be willing to lose money so the fans can watch the games; that the owners deserve our contempt for making fool decisions, but the players who make millions of dollars a year and and wisely invest it all on gambling and drinking and feeding "posses" deserve our pity; that it is sad to see noble athletes reduced to haggling like fishwives; that since sports speak to the child in us we are offended when grown up concerns intrude; that the loss of money the popcorn vendors suffer by the lockout is sufficient reason for the owners to pay the players any salary, whether they like it or not.

None of that is what America is about. America is about freedom. Meaning your money is your money, not someone elses. You have no obligation to feed popcorn vendors and athletes, nor to cater to the infantile fantasy worlds of some strangers.

Sunday, October 9, 2011

What Determines Interest Rates?

I got some insight into this question from reading America's Great Depression [available free at mises.org].

We are going to talk, yet again, about liquidity theory versus time preference theory. A search of this humble blog will reveal a few earlier articles we have written on the subject. This time, armed with new insight, we will lay it all out, Smiling Dave style.

All economists agree that when a man takes home his newly earned money, he can do three possible things with it.

1. He can just leave it in his wallet. This is called "hoarding" if you think it's a bad thing, as Keynes did, or "increasing ones cash balances" or "increasing ones demand for money" if you think it's OK.

2. He can spend it on things he wants to consume.

3. He can try and use the money to make more money. This is called investing his money.

Obviously, he need not put all his eggs in one basket. He can use part of his money to invest, part of it to consume, and part of it he can just keep in his wallet for now.

OK, where do interest rates fit into all this? Very simple. What if you, dear reader, have money sitting in your wallet, and I want to open a shoe store, and need your money to help me get started. How do I convince you to part with your hard earned money and lend it to me? The obvious method is to promise to pay you interest. If you agree, you have changed what you do with your money from hoarding to investing.

How much interest should I offer you? Keynes said, "Whatever it takes. Mr. Dear Reader obviously wants to keep his money in his wallet for now, and your job is get him to change his mind. You have to overcome his 'liquidity preference', meaning his desire to just keep it right there in his wallet, unspent and uninvested, by making it worth his while, in his opinion, to give it to you."

And whatever it takes to convince the dear reader to lend me his money is what the interest rate is going to be. This is the liquidity preference theory of the interest rate.

Mises has said about the liquidity preference theory of interest that it is
...a view, indeed, of insurpassable naivete. Scientific
critics have been perfectly justified in treating it with con-
tempt; it is scarcely worth even cursory mention.

Which raises an obvious question, to wit, why does this theory deserve to be treated with contempt?

I can think of one reason. First of all, I will not pay you whatever it takes. There is a certain amount of profit I can expect to make if I open my shoe store, [say 10%] and I cannot possibly offer you more than that, obviously. Second of all, what will make you happy is also determined by how much the shoe store can make. If, after reading through my business plan, you see I expect 10% profits before repaying you, you will not be content with the same interest rate as would be the case if my forecasts were that I will make 2% profits, or [on the other hand] 50% profits.

Thus, both from my side of things and from your side, the interest rate depends on how much profit is to be made from my shoe store.

Which leads right in to the Austrian theory of interest rates, that indeed the profits to be made from the shoe store [called the "natural rate"] will determine what the interest rate will be on loans.

Then the question arises, what determines how much profit the shoe store will make? This leads us to deep territory. Which is beyond my abilities for now. Luckily, we have mises.org to help us out with this, so I place you in their gentle hands.

Wednesday, October 5, 2011

Where Does Dave Go From Here?

Well, dear readers,with 100 published posts, it's time for a rethinking. Here's what's going on:

1. While writing part two of the gold standard, I felt that although I could refute the rest of that article in a general way, it behooved me to learn a bit more before publishing. And so, I feel it's time to hunker down and hit the books.

2. I fear I may start repeating myself.

3. I'm not sure what my loyal audience [and I mean you, the fellow who seems to be reading all I ever posted, and you, the people who come here from mises.org, and of course my faithful four followers] wants me to write about.

4. Bottom line, until inspiration comes either from within, in the form of an urge to write, or from without, in the form of a request from my dear readers, Smiling Dave will hit the books.

5. And I'll tell you what's stopping me from finishing the gold standard article. The National Review argues that returning to the gold standard will bring about deflation. Now normally, deflation is a good thing. But as I pointed out in my articles on deflation [the good, bad and ugly], when it happens because of a return to the gold standard, it can be ugly indeed.

I've seen Rothbard write that the ugliness happens because the return is not done correctly, but did I not see what the correct way is.

So for some unspecified while, I'm going to educate meself, one eye on the laptop to see your feedback.

EDIT: Today, 11/16/11 I heard an answer on the Peter Schiff Show from his guest, James Rickards. He said that the wrong way to return to a gold standard is how Winston Churchill did it when he was Chancellor of the Exchequer in 1925. He set the price of gold too low compared to the mountain of paper money the govt had printed during WW1.

Sadly, I don't remember the continuation of Rickard's thinking. Time to hit the books some more.