A recent, crazy, commenter accused me of simply spouting rhetoric, rather than presenting solutions.
While I make constructive suggestions in virtually every serious post, ok; I can see how they'd be disguised and hidden by my phrasing, when I say things like "what we should do instead is..."
...I can understand how that might be confusing.
So here's a straight-out, rhetoric-free alternative plan for economic recovery; no confusion this time, hey? Like any such plan, I doubt it's flawless, and no doubt there's something missing; suggestions are welcome. But as I lay out the points, one at a time, I will explain precisely why they are applicable, so this may be a bit long.
Ready? Good. Brace yourself.
- First things simplest: do away with the mark-to-market rule.
The mark-to-market rule, as it is called, is an accounting method under which a margin is provided by a trader - a deposit, basically, constituting a percentage of the trader's intended purchase - and at regular intervals, usually once a day (except in the Chicago Mercantile Exchange, which does this twice a day,) the derivatives operated by that trader are marked to their current market value. If the trader's position is improved, the exchange immediately pays the difference into the trader's account; if it is reduced, the trader has lost money, and if the reduction brings the trader's account below the required margin, the trader has to immediately pay in extra money to cover the difference.
In practice, this is fine when dealing with objective commodities with clear market values. The really egregious accounting fraud comes from over-the-counter derivatives, which are contracts directly between the buyer and seller. This is because they are NOT traded publicly, and as such have no actual market value; this allows the mark-to-market rule to be used, essentially, for the traders to pay themselves gigantic sums of money by, essentially, doctoring up computer models to show that the derivatives SHOULD be worth something, and then paying themselves based on the synthetically-estimated value.
To clarify from that fairly dusty description, here's how mark-to-market works.
You go to the grocery. You want to control the flow of bread; so you pay the grocery a percentage - say 15%, though usually a lot less than that - of the price of all the bread in the store.
Now, once a day, the store checks to see if the price of bread has gone up or down; if it goes up, you get paid. If it goes down, you don't, and if it goes down enough, you have to pay the store extra money - this is called a "margin call," by the way - to keep control of the bread.
Now, say instead of going to the STORE for this, you go to all the customers, and make deals with them directly to sell them bread at certain prices.
Then you go back to the store and simply tell them that the price of bread has gone through the roof, and they pay you.
This works great, until someone figures out that the price of bread HASN'T gone through the roof, or indeed moved at all; or in the real world, figures out that your debt instruments - like, say, mortgages - are actually completely worthless.
Then you're in deep trouble, right enough.
This already happened, didn't it?
- Cut - at least in half - the capital gains tax.
Capital gains is a tax on the profits from investment (and the sales of certain kinds of real property, as well. Like houses.) The only way to avoid it is not to make any profits.
Can anyone see how this diminishes the vitality of the stock market?
When you tax investment, people will invest less; this is simple and obvious. Vastly reducing capital gains taxes will spur growth in the stock market, not later, but now. This has many effects, of which I will detail several here; you will most likely see those same effects again.
First, when the cost of investing drops, more small investors will be able to enter the market; this broadens the base of the market, and helps revive the ailing middle class, and enable upward mobility acros the board for all economic levels.
Second, the bigger investors will be able to place larger investments into the market; this again boosts the market, and gives both corporations and banks greater capital liquidity. This is a spiderweb effect; corporations are interconnected, as are banks, and they cross-invest in each other. When the market receives a large injection of capital NOT derived from the market itself - in other words, not first taxed out of it - the effects ripple back and forth, amplifying each other, because each company, as its stock rises, also boosts the stock values of every company and bank which holds its stock; these increases are a self-reinforcing trend.
Third, this increases the salability of real property, as the cost of the sale of real estate itself will drop; this will ease one of the major stresses on the real estate market, and allow many of the defaulted mortgages to be disposed of by the banks, because they will be able to write off the defaults when they successfully resell the actual property. The defaulted mortgages are inherently worthless; that's what "default" means, that there's no intent to pay, ever. Simply reselling the derivatives based on the defaulted mortgages, as per the Geithner plan, doesn't magically make them worth anything, and as long as they are carried on the balance sheets of the banks, they will continue to be an anchor weighing down the banks, and the economy; in order to allow the banks to begin to recover, those valueless items must be removed, and the only way to do that is to replace them with something that HAS value.
- Either one: institute a flat tax, or simply cut the highest marginal tax rates.
For some reason, "tax the rich - it's only fair" seems to be a mantra of people who don't understand the basics of how the economy works. In 2006, the top 1% of wage earners earned 19% of the income in the United States.
Oh No!
Except the people who rant on and on about this seem to ever so often conveniently leave out the fact that that SAME 1% of wage earners paid 28% of all the income taxes paid in this country. "Fair," imples an even playing field for all; not one group getting shamelessly ganked for 9% more than their share, just because they have more money.
It's worse than it seems, though; not only is this unfair, but really, profoundly stupid.
See, poor people, by and large, don't invest. They don't invest because the overwhelming majority of their income goes to subsistence; they buy cheap food, cheap clothes, cheap housing. McMansions, gourmet food, and Versace are paid for by the rich; all of which employ people - but more importantly, they have money left afterwards, and they use that money to invest, which boosts the stock market in all the ways described above, and helps reinvigorate the economy across the board.
Rich people are also more likely to actually PAY when they buy things on mortgage, which assists banks and their capital liquidity.
Now, my previous obsessive commenter attempted to make a point against cutting the top marginal rate by saying that rich people, given a tax break, would simply put their money in savings; this displays marvelous ignorance. Savings are held by BANKS, and provide the bulk of the capital the banks use to make loans; whether the rich invest directly, or save, they're still investing, and that boosts the economy directly and immediately.
- Cut - at least in half - the corporate income tax.
The corporate income tax is an illusory tax; it only sounds like a good idea if, again, you failed basic economics. This is for several reasons; first, those taxes are passed along directly to the customers of that corporation in price increases, second, this encourages corporations to seek countries with lower tax rates, thus driving increased offshoring; third, since it increases the prices for the affected corporation, it makes domestic corporations less cost-competitive with foreign-based corporations, which - again - ripples, weakening employment and the general economy.
Cutting the corporate tax rate reverses all of that; it makes domestic corporations more cost-competitive against foreign-based corporations, which drives domestic employment, and lowers consumer prices - thus driving demand - especially easing things for consumers with lower incomes; it encourages corporations to remain domestic - again building domestic employment - and creates incentives for foreign corporations to migrate here; and it encourages the corporations themselves to invest, again boosting the stock market.
Currently the United States' corporate income tax rate is 39.3%, the second-highest in the world, lagging behind Japan.
Does anyone think this HELPS keep corporations, and employment, and low prices, here?
- Pass a balanced budget Constitutional Amendment, requiring the federal government spend no more money than it has - and making "off-budget" spending illegal.
Currently, Congress not only spends staggering sums of money with seeming impunity, but repeatedly hides far more spending - as "off-budget" spending - than they reveal publicly.
I have discussed before the reasons that government spending outside the necessary functions of government is harmful, but let's briefly cover it again.
When a government taxes, borrows, or prints money for the purposes of spending it, it creates greater economic damage than it resolves. Look at it in terms of a mugging.
If you mug someone, take a dollar, and then visit them the next day and return it, what they have is the same dollar they started with, plus some bruises; this is taxation.
If you mug someone ELSE, take a dollar, give it to the first guy, and then set Vinnie the Loan Shark on him to make sure he pays vig on it, what they have is less than they started with, plus a loan shark and possibly broken legs; this is borrowing.
If you mug someone , take their dollar, then give back two quarters, what they have is twice as much currency, half as much value, and some bruises; this is inflationary printing of money.
I will note here that Keynesian economic theory - the theory followed by our current President - states that if you mug someone for a dollar (to continue the analogy,) and then give it back to them the next day, they get a dollar and a pony! Let me know if you can see that this is openly absurd.
Instead of demanding that the government spend our money in the following ways, and giving them a list of pet projects, we should instead be demanding that they don't take our money at all. The government cannot create demand; it cannot change the actual market value of things based strictly on say-so; it cannot choose for us the products and services we need most desperately; it can only interfere, and at best act as a mild annoyance; at worst, well, we have the last quarter of last year. Look where THAT got us.
Restrict the government to spending only what it can actually afford - not based off projections for next year's revenues, but based off how much they have in the bank THIS year - and require that it remain limited to the Constitutionally described functions of government (this is a whole separate and soon-to-be posted I hope blog entry, by the way,) and you will have removed one of the HUGE roadblocks to recovery.
As an expansion on this are the last three points; they are all major, and important, but they are derivative from that last one.
- Require oversight of all for-contract jobs performed with tax money.
- Institute punitive penalties for failure to meet bids on for-contract jobs performed with tax dollars.
- Privatize all elements of the government not provided for in the Constitution.
Taking these all at a lump...
One of the big ways our money gets wasted is that the government allows companies to underbid their competitors without any oversight over the actual project, or any expectation that the bid actually be met; this is why citizens in Hawaii are able to - through volunteerism - perform in 8 days a repair the state claimed would take years and millions of dollars. Part of this is that the government spends loads of our money on things that it's specifically forbidden from doing in the first place; nowhere in the Constitution is there any authority for the government to make home loans, guys.
And the Tenth Amendment says, if it's not specifically enumerated in the Constitution, as home loans, medical care, stem cell research, gay marriage, abortion, gun licensing, speed limits, farm subsidies, insurance, banking, food safety, communications, the internet, porn, workplace safety, and transportation are not, then it is the province of the States or the people.
I'd personally start with FNMA and FHLMC; privatize Fannie Mae and Freddie Mac, and get the federal government out of the home loan business entirely; it's not an accident that these two government entities were holding better than 50% of all the bad loans in the country.
As a tiny note of expansion, here, I remembered at the last second to note that, despite lefties screeching that growing the stock market only benefits investors, and "this only increases shareholder value!" they seem to overlook something simple: MOST of us, through employment, have some form of IRA, these days. You can even get an IRA from the grocery store.
IRAs are run as stock-market mutual funds; this is why so many of us got wiped out in the crash.
So, if it increases stockholder value, doesn't that also help...
...Us?
Anyway, that's my idea of a "recovery plan," and I'm sure some of you - particularly Lee and Jesi - will have constructive criticism and hopefully some additional ideas.
Is that rhetoric-free enough? I wonder.
