Why the American people shouldn’t make tax policy

I think it’s fair to say first, that while I’ve been gone for a while from posting to this blog, I haven’t been living under a rock, nor completely out of touch.  So there are lots of thoughts and opinions I have concerning the recent events in the US financial and governmental spaces.  I will do my best to not talk at length about past issues nor cast too much one sided blame, mostly because I think the entire mess was avoidable, and the politics surrounding the debt ceiling, jobs creation, etc are so far out of control that I simply must state, everyone in Washington that was in office for the last 6 months simply doesn’t deserve to be re-elected.  Period.  I’ll consider a pass for freshmen (2 years of less in office) in the Congress that didn’t stand purely on party lines, but rather stood up for common sense and practical solutions (should any of those actually exist).

But that’s not what prompted me to post today.  Nope, this post is directed at everyone in America.  Yep, at me and you and all of our neighbors.  You see, there is a popular stance right now (favored in the democratic circles, but popular all over) that somehow taxing the rich is a great way to resolve some of our debt problems.  This allows that group to “protect” the entitlements programs where we spend a huge volume of our budget.  In still other circles (these being more of the republican ones, but again not exclusive to them) the cry is to reduce spending, and not allow taxes to be raised.  Both of these positions are popular positions and both do have some degree of merit…  however…

Let’s take a look at a few items related to each stance.  First the tax the rich argument.  Let’s face it, we ALREADY tax the rich (despite the rhetoric heard in many left leaning media sources).  The “rich” (we’ll talk a moment about why that is in quotes) account for about 3% of the population, and roughly 26% of the income earned that was taxed.  Yet the top 5% of earners pay roughly 60% of the taxes.  So about 5% of the people, earn roughly 30% of the income, but pay 60% of the taxes.  Should the Bush Era Tax Cuts expire, and I suspect they will, that percentage will only go up.  With our progressive tax brackets, you pay higher and higher percentage of tax as your earning go up (capped in the 35-40% range I belive, but I’m not sure on that).  For the record and to ensure I try to stay fair, from that same report, out of the 4 million people that are “rich”, 1470 didn’t pay any income tax and the corporate taxation problem (handouts plus tax breaks) is one that simply must be solved.  But where did the definition of “rich” come from?  Why is that level chosen, when in fact different areas of the country have different costs of living, making it likely that in some places 200,000 feels rich, where in others it just feels ok.  But even if we go after the rich, what then?  We generate $750 billion over 10 years, or $75 billion per year.  Now that IS a lot of money, but compared to the actual debt, it’s peanuts.  It is something, which as they say is better than nothing, but still peanuts compared to the problem.

So what about spending cuts?  Sure everyone can talk about the waste in government, and everyone can point to stupid things that we’ve seen the government do and buy.  But where is the real money going?  Let’s look at the spending we did in 2010 for our data.  24.5% of our money was spent on Defense (I didn’t dig enough to know if this includes or excludes the wars in Iraq and Afghanistan), followed by Health Care (23.7% with 13.1 percent being Medicare), Pensions (21.7, with 20.4% being Social Security), Welfare (14.5%), then we have Interest on our Debt (5.7%).  We spend more on interest on our debt than we do on Education (4.1%), Transporation (2.7%)  and Protection (Police, Fire, Courts, Prisons)(1.5%).  Ok really?  We allowed our debt to get so high we spend more on interest than on our schools and roads?  Anyway, let’s see that makes huge elements of the budget untouchable in the current political environment.  Cut defense (do you want the terrorists to win?), medicare or social security or welfare (why do you hate old people and the poor?), so that leaves the next biggest category.  Interest on our debt.  Hmm even politicians probably realize that can’t be cut, so on to the next line items, schools, services, and roads.  Yep, let’s cut the things that made this country an economic power house, so we can recover the economy.  Makes sense I suppose to someone not looking at the budget, or doing math, or thinking about it.  If our politicians can’t compromise on ideological issues, we get stuck taking the cuts in the programs they can agree to cut that hurt the population the most.

So why is this post pointed at the American people?  First, I’ll just say it.  As a collective group, we are too stupid to make rational policy about multi-trillion dollar budgets.  Sure I don’t like paying taxes, nor allowing our defense to get weak, nor take money out of social programs.  I want to have it all and not pay for it.  Wouldn’t that be great?  As a populace, that is exactly the message we send to our government, and it just isn’t possible.  I’m not defending their actions, becasue IF they were leaders and not poll-following, vote-grabbing, self-serving, special-interest-puppets they could calmly tell us that we’re too stupid to make these decisions, they’d get into a room and discuss, debate, and decide on actions that were good for us despite our short sighted whining about taxes and services etc.  Of course, that would also require them to act for the people, not for themselves and we don’t seem to have those guys (or gals) running for office much anymore.  They’d also risk not getting re-elected because they acted for the good of the country and not the good of selected voting blocks in their district or party (yeah I’m talking to you Tea Party).

So while everyone likes to complain about the idiots in Washington, and I’m easily in that category, let’s remember, we send them there, we tell them (through polls and things like blogs) what we think about their actions, and through their lens of “job security” they try to please everyone, while pleasing the special interests, making compromises on issues, and trying to stay vaguely close to on top of the polls so they have a job in the future.  Which is why I say, “The American People Shouldn’t Make Tax Policy, we’re too selfish and stupid as a collective group to do so effectively.  We like WalMart; goods and services for cheap, even though they are cheap goods and services, and that’s no way to run a coutry’s financial policies.

Now that I’ve pretty much angered everyone who got  this far in the post, thanks for reading.  🙂


Defense spending, out of control…

Not long ago, Secretary of Defense Robert Gates gave a speech on the defense budget and defense spending.  In it he states:

the US battle fleet is larger than the next 13 navies combined, 11 of which belong to allies and partners

The Pentagon must hold down its spending and make choices that will anger “powerful people” in an era of economic strain, Defense Secretary Robert Gates said in a weekend speech in Kansas.

I had pointed this out in a video I made a few years back, granted this was focused on the War on Terror and the Bush Administration’s Policies, but let’s be honest, so far Obama hasn’t exactly brought the budget into control for defense or overall.  Granted economically he was more challenged by failed policies of previous, but he hasn’t (publicly) shown to have reduced the defense budget or spending.

Now I am ex-military and insist we arm and equip our service people with the tools needed to carry out their mission, but when we are so overwhelmingly big vs our next competitors, it really shows we’ve gotten out of hand in our priorities and spending.  Given that we’re touting how our taxes are the lowest in years, I’m curious how we think we can stay viable when we are running ever larger deficits and spending more with each year relative to our economy?  I guess the theory is if we can beat the rest of the world up, we can’t be forced to pay our debts.

A plan for the economy

I blogged recently about a thought about stock purchase as a means to bail out the weakening sub-prime brokers.  Well it turns out that similar thinking was going on in Washington, and it resulted in this plan, being proposed by Chris Codd.

“Senator Chris Dodd, the committee chair, said he is working to create a Home Ownership Preservation Corporation, which would purchase mortgage securities that are backed by at-risk, subprime loans from lenders and investors.

This corporation would give these lenders and investors a better price for the securities than they would get if the properties backing them were put through foreclosure.

Additionally the loans on these properties would be restructured so that borrowers could afford the new payments and remain in their homes.”

Essentially this buys the bad debt, restructures it and re-prices it, then sells it back to the industry.  Essentially a cash infusion, to the places that needs it, the financial companies laden with bad debt.  The good news is that it does what is needed from a cash flow perspective.  The bad news, which may not be bad news but just wasn’t clear to me, is what oversight and policy changes will accompany this move.  I firmly believe that if we bail out corporations who made bad debts with a bailout, and don’t bother to provide legal oversight, or ensure that the cash we put in comes back out at some point, then we just paid off the people who made bad decisions.  Bad Bet on Credit?  No worries we’ll fix it on the taxpayer dime.

Now before I come off sounding all cynical (or is already too late 🙂 ) I think this step is needed, and I do give credit to the folks in Washington to have enough sense to at least hire real economists.  Dodd has some experience here and I think they’ll have some oversight in the deal or to follow.

Rebates won’t fix the economy, stupid

It was announced recently that congress and the president are going to pass a package that cuts checks for every American to the tune of $600.  Now I’m not the kind of person who likes to turn down money that is being handed to me, especially money that initially was mine to start with.  However…

How is this going to solve anything in the deep and murky waters of deficit spending and SIVs and CDOs and multi-billion dollar finance?  Ok it isn’t, it’s hush money.  It’s “please don’t fire me” bribes from politicians who know the public will be out for blood at some point, and they want to give the impression that they are actually doing something.  But the truth is (as much as I like to pick on politicians) this isn’t their fault.  At least not entirely.  But dropping $150 billion into a completely useless spending package when that money could be used for any number of other useful causes can only sourced in fear of their job at the hands of the voters who will “toss the bums out” because this happened on their watch.

The truth about the financial crisis goes deeper, via things like the situation with Ambac, and the deepening crisis in how much debt corporations have allowed themselves to operate in.  Sure you can make an argument for poor federal oversight here, but really this one stands firmly at the feet of the corporate risk management.  They failed.  Because they failed, nearly 100% across the board, we find our economy in the toilet.  So inevitably, we will see corporations seeking funding to cover their debt, CEO job loss, and other “adjustments” along with a growing likelihood of some further federal response.  I’d be willing to bet that after we get out of the immediate election year crisis of making voters feel good, we will see some people trying to pass fairly broad laws on how to regulate this issue “so it won’t happen again”.

There are lots of ways to solve this, but I’ll toss my thought into the ring here first.  Then I’ll be contacting my congressional and senate reps to see if this can be used as a means to settle the crisis down.  Please note:  I’m certainly no economist so this could be be pure madness.  But it sounds good to me 🙂

First, large institutions like banks and bond insurers need capital, to cover the losses in case they all came due at once.  Hopefully that is still avoidable, but hope is not a strategy.  Second, the government wants to be able to monitor and control and appear to be doing something about this, to both bring things out of the downward trend, but more importantly, to reassure the constituents that they are accomplishing things on big issues.  Third, this one being my opinion and feeling, the measures must be temporary such that the markets can move back to less regulation after the crisis is over and the markets have stabilized.

So instead of giving out $150 billion in checks which may not arrive until summer how about having our government buy stock from the troubled companies?  It gives the cash to the places that need it, and makes the government (hopefully via the fed and some actual economists) a seat at the stockholders table.  We know that the corporations listen when that group speaks.  So with $11+ billion in writedowns at Citi, and other Banks hitting $2-8 billion why not just drop an $11 billion stock purchase on them from Uncle Sam?  I don’t know the ratios of investments, but I’d be willing to bet that investment at this levels gets a seat on the board 🙂

Now the US gets a say in the operations of the bank or insurers that are in trouble, they get cash, and things can stabilize, if not improve, oh yeah and we likely spent less than $150 billion.  Now as things improve, the companies can buy back the stock from the US, slowly or in large chuncks as capital permits, which regains their autonomy from the government.  If they never choose to buy back, they stay regulated, if they choose to buy back some or all then they move back to less regulated model.

 Oh yeah, and politicians…  not only does it looks like you did something with this plan.  You actually did.