The Big Tax Cut Debate

In a shocking turn of events, the federal government has voted to maintain the status quo. That is, of course, sarcasm as the feds have an amazing track record of kicking the can. The "irresponsible" Bush tax cuts have been extended based on a deal cut by the Obama administration with the Congressional Republicans. In addition, unemployment benefits have been extended yet again.

This debate has been somewhat of a false debate. The Bush tax cuts were passed in 2001 with a provision to expire at the end of 2010. Rates would then return to the levels which prevailed during the Clinton administration. The debate and rhetoric on this issue have allowed Washington to shine at its finest.

Take, for example, Rep. John Shadegg (R-AZ) a couple weeks ago on MSNBC's Morning Joe. Shadegg makes two incredulous claims all-too-typical from partisan Republicans.

Of course Republicans don't want to tax the job creators, because that will bring revenue down... Ah, your answer is that spending money drives the economy, and I don't think that's right. It's the creation of jobs that drives the economy. The truth is, that the unemployed will spend as little of that money as they possibly can... Do we want... to continue to ignore the issue of jobs and increase taxes?

In the quote above, Shadegg attempts to make the case that, first, spending doesn't "drive the economy".
Well, unfortunately, that is incorrect. As much as supply-side economists wish to think otherwise, an economy requires spending. If no one is purchasing goods or services, then there are no jobs. Spending (i.e. demand) necessitates the availability and provision of goods and services - which, in turn, requires jobs.Without debating the merits of government-provided unemployment benefits, you cannot dispute that those checks drive spending. While that spending may not "create" jobs, it most certainly helps maintain the status quo and, at least, "saves" jobs.

The second key fallacy in Shadegg's nonsense is his suggestion that raising taxes means less revenue for the government. This assertion is an implicit reference to the Laffer curve, a concept in tax policy. The curve, named after economist Arthur Laffer, suggests that there is a tax rate somewhere between 0% and 100% which maximizes tax revenues. I could get into a lot of math and show some graphs to discuss this, but, on the surface it should be obvious. With a 0% tax rate, there is clearly no tax revenue. It is also suggested, but not empirically proven, that a 100% tax rate yields no revenue since the economy would go completely underground if no income was retained. This makes sense. Obviously there must be an optimal rate somewhere in between.

The Republicans, and far too many fiscal conservatives, always seem to assert that any increase in the tax rate would decrease revenues. This implies that we are already on the downward slope of the curve leading towards the 100% tax rate. A look at the real data (at least from the last two decades) would not suggest such a fact.

Source: IRS. Data in thousands of nominal USD.

Source: IRS.

The table above shows a history of net taxable income by year and total net income tax receipts. The effective rate is the simple percentage calculated between the two. This reflects the net effective tax rate in the U.S. after we account for all the deductions, credits, marginal rates, etc. In the graph immediately above, we look at the relationship between these effective rates and total receipts (now expressed in millions of dollars and adjusted for inflation). There is no clear pattern which suggests that it is impossible to conclude anything of substance from the so-called Laffer curve based on today's tax policy and macroeconomic conditions.

I must make one very important point: this does not qualify as my endorsement for higher tax rates. I personally would have voted against the deal to extend the tax cuts in the absence of massive spending cuts. Today's taxpayers are responsible for electing the officials we have setting the budget today. It is irresponsible to create a larger deficit, increase the national debt, and put our currency at risk for the next generation. It's time that our representatives take a stand to remove our structural deficit issues.

Status Update

It's been several months since my last substantive post and a while longer since I posted with any frequency. There's been a lot going on!

Last time I posted, I had indicated that I would be serving as campaign manager for Mike Wherry, who ran for Secretary of State of Indiana for the Libertarian Party. I spent about three months in that capacity before I resigned. It was a lot of work and a lot of late hours. After a few weeks of hiatus, I again increased my focus on the 2010 elections by supporting the Senate bid of Rebecca Sink-Burris and helping to organize electioneering activities for the Libertarian Party of Marion County.

I have become increasingly involved in LP politics and plan to continue to do so. I have no desire to support the establishment political parties and feel that I've been able to make a difference in the local LP. It is also clear to me that political activism is a necessary tool in the fight for political causes - in my case, liberty, opposition to government tyranny, and corporatism.

So, it is time to rekindle my writing to create awareness, provide analysis, and educate readers on the causes that I care about. I have not yet decided on the mix of content that I will pursue; this will probably evolve. I will talk about issues here in Indianapolis with increased frequency as well as statewide issues. I will not completely abandon issues of global economics, geopolitics and U.S. policy, but the mix will change.

I thank everyone for reading. I've also set up a Page on Facebook ("Like" me) and a Twitter feed ("Follow" me) to expand distribution and content.

Coming Back Soon...

We will resume our (not-so-) regularly scheduled blogging soon.

Latest News

Folks, my limited blogging on this site is likely going to continue. I am going to be the campaign manager for Mike Wherry who is the likely nominee for Indiana Secretary of State for the Libertarian Party. Of course, we will welcome your support since this is the ballot access race in Indiana.

Visit www.mikewherry.com.

The Money Tree

They say that money doesn't grow on trees. That's true. It grows in banks.

I'm not talking about compounding interest either. I'm talking about creation of money right out of thin air. It is well known and understood that the Federal Reserve (and other central banks) print money at will. What's not so well understood is that regular commercial banks essentially do the same thing. To understand this, we have to explore the nature of money, credit, and the modern banking system.

Money can be described in several ways and has a variety of characteristics.We should begin with the Merriam Webster definition: "something generally accepted as a medium of exchange, a measure of value, or a means of payment." In early simple economies, barter was the principle means of exchange. This ultimately evolved to commodity money. Items which had a useful value on their own, are easily transportable, do not lose value or deteriorate, and are reasonably commonplace would serve as commodity money. Over the centuries, metal coins evolved out of being simple commodity money into serving as government issued currency. Generally, the metal coins face value as issued would be equivalent to the metal's value independently. Of course, governments were notorious for devaluing the coins in a variety of ways.

Commodity money gave rise to modern fiat monetary systems. This evolution came to past after many centuries and after the introduction of paper currency. The United States ushered in the new era in 1971 when President Nixon "closed the gold window" removing the last link between the U.S. Dollar and gold. Fiat currency has its value because the government declares it to have value. Essentially, a U.S. Dollar as issued in paper (specifically, a Federal Reserve Note) is a debt of the Federal Reserve backed, not by gold or any commodity, but by a debt obligation of the U.S. Treasury (notwithstanding the other assets which the Fed has added to its balance sheet since the onset of the Global Financial Crisis).

Let's follow the circle: the U.S. Treasury issues debt (bills, notes, or bonds) which is purchased by investors such as large banks; the Federal Reserve buys Treasuries from large banks in return for freshly printed cash; this cash makes its way out to businesses and consumers via transactions with the banks; the money is used to pay taxes going to the coffers of the U.S. Treasury; and, finally, the U.S. Treasury repays the Federal Reserve on its debt obligation ending the circle with the destruction of the currency. This process is how our money derives its value. This complex circuit is important, but it does not tell the entire story. Much of this process is digital. Who pays their taxes by sending paper currency to the IRS? No one. Bank accounts are increased and decreased digitally by computers throughout this entire circuit.

This is where it gets interesting. Throughout this process, the various entities may also use credit as money. When someone uses a credit card or receives a loan, cash is usually not involved in the transaction. And, as most everyone knows, in our system of fractional reserve banking, banks can and do extend credit beyond their cash reserves. The typical example of how this works goes something like this: Joe deposits $1000 with Bank ABC; Bank ABC then lends $900 to Jane maintaining $100 in reserves; Jane spends $900 at the store who deposits the cash with Bank XYZ; Bank XYZ lends $810 to Jack (keeping 10% or $90 in reserves; ... and so on. This process expands the money supply without the issuance of new cash. Jack still has $1000 which he can spend on goods and services. But, Bank XYZ also has $810, and everyone else on down the chain. The size of the reserve requirement will determine how much money is created via bank credit. If the reserve ratio is 10%, then this process would ultimately create $9000 if exhausted completely.

However, this is not how the real world actually works. This is the important part of the story. Banks do not wait to receive deposits before they lend out new money. A bank does not need to physically have $250,000 on hand (in cash or even in assets) to issue a loan of such size on a house. If a bank issues such a loan, they simply need to ensure they meet their reserve requirement which can be done by receiving a loan from another bank. This chain ultimately goes bank to the large privileged banks who can access funds directly from the Federal Reserve. The Fed is ultimately reacting to this credit creation cycle in its operations with these banks (as described above). If you want to read more about how banks defy common wisdom and create credit out of this air, visit George Washington's Blog and read this and this.

We've already established that credit is, in effect, money. It does not behave significantly different than cold hard cash. Many economists and fiscal conservatives have rightly criticized the Fed and its expansionary monetary policy. But, what is lost in the argument is that the private banking system has been expanding credit for decades. They have been free to do so via the implicit rules and policies of a fiat-currency, fractional-reserve system. The implication is that the money supply, and its impact on inflation, must be analyzed from the perspective of credit expansion - not the expansion of the Fed's balance sheet. The Fed has tried desperately to stave off deflation by "printing money" to buy all sort of dubious assets and monetizing the federal deficit. But, this has had little inflationary impact. Why? Banks are still not expanding credit.

Let's analyze this a little deeper. Why are banks not expanding credit? Largely because consumers are not willing to take on more debt. We have hit the wall. We have had our inflation moment. As we pay down debt (or default) and credit is destroyed, we will experience deflationary forces. Admittedly, this is not the whole story. The international perception of the Dollar is still a major factor in the inflation/deflation debate. But, with the financial challenges of Europe, a Japanese economy which has been stagnant for more than a decade, and no other major economies ready to challenge, the Dollar will reign supreme in the interim.

But, there is another problem with all of this. The banks do have a money tree. They have an implicit license to print money. Sure, they cannot literally print money. But, is this still not counterfeit? Is this still not fraud? They make money on this process by collecting interest. I ask my readers to consider this carefully and study the evidence. If the banking system is engaging in a process that is tantamount to counterfeit, what should be done? This is hardly an example of free-market enterprise. The next time that you begin to reflexively defend banks against reform, vilification, and other abuses in the spirit of free-market capitalism, ask yourself if they deserve such a defense or if they are essentially nothing more than a rouge arm of the Federal government.

Check This Out

Well, it's been another long hiatus. But, check it out: new site design! Hope you like it.

As for content - I don't have anything of my own to post, but I'd like to invite you to read this post over at Oftwominds. I'm a fan of this blog as the author, Charles Hughes Smith, posts on a variety of subjects from economics/finance, self-help/survival, social evolution, food/health, etc. This particular post provides a detailed look at the economy and the way forward. He's a short-/mid-term dollar bull while bearish on the overall economy. It's chock-full of links to some of his own articles as well as a few other blogs.

Quick Thoughts on Chartalism

Chances are that you've never heard of chartalism (unless you arrived here because you Googled the word). I've been reading an increasing number of articles which argue certain points which are central to the economic theory of chartalism. This theory is centrally focused on characteristics of a fiat currency regime. The basic assumptions and conclusions are sound although I have not studied it enough to have a fully informed opinion. Further, I disagree on principle with some conclusions on the surface level.

So what is it all about? Basically, the chartalists suggest that the state issues fiat currency via government spending and recoups (destroys) the money via taxation. Thus, fiat issue is no more than printing money and, if the government did not do so, there would be no money for citizens. This extends to a conclusion that the private sector cannot save money unless the government runs a deficit. This is further shown by using simple algebra with the formula for GDP. This reinforces the argument of the adherents.

I see a few basic flaws in this theory. First, if there were no fiat money, that would not destroy economic activity. There would be, at a minimum, barter activity. Second, it seems to ignore debt (or at least under-appreciate its role like most all schools of economic thought). Since private banks issue credit, the state is not the only entity which can issue currency (depending on one's definition).

Nonetheless, this is important. Governments can and do print money. The U.S. Dollar is essentially backed (primarily) by U.S. Treasuries. In other words, the value of the Dollar is derived by the use of it to pay government debt. The point remains that next time you find yourself in a debate about the nature of the state and deficit spending, one can not summarily dismiss the notion that deficits don't matter or the suggestion that the U.S. will not default on its debt. There are shades of gray to this. Again, I don't completely agree with all the assumptions or conclusions of this theory. But, well-informed (and sometimes even well-intentioned) adherents will make good points - specifically that this theory is sound due to its identity relationship from the GDP math.

One of the main goals of Stop Taking Soma! is to educate and inform. Shouting matches between ideological opponents and semi-informed debate participants are a problem in the political environment. If libertarians (small "l" or big "L") or other marginalized political (or economic) groups fail to understand the perspective of our opponents, we will risk continued marginalization and be reduced to nothing more to uninformed noisemakers.

For more on chartalism and its post-Keynesian cousin circuitism, visit the forum on Steve Keen's blog and read this thread. (Full disclosure: I have not yet read it.)

Cool Trilemmas

I'll admit that my vocabulary did not contain the word "trilemma" until a few weeks ago. It's a natural extension of the commonplace "dilemma" where we have three options. Then, in a span of no more than days, I was exposed to two interesting trilemmas.

The first trilemma that I would like to introduce is the so-called "Impossible Trinity". This hypothesis states that a national economy can only achieve two of the following three characteristics: a fixed exchange rate, free capital movement, independent monetary policy. A nation with a fixed exchange rate is able to maintain a stable currency as it relates to the rest of the global economy. China, for example, maintains a fixed exchange rate by pegging its currency to the U.S. Dollar. Nations with free capital movement allow goods and services to be (relatively) freely traded by private citizens across borders without significant taxes or other restrictions. This is a common feature of globalization. Finally, independent monetary policy implies that a nation's banking system (usually via the central bank) can set interest rates and manage the supply of money without outside interference.

This trilemma is an important one to understand (and I think it is generally accurate) in the context of global political economy. Using the China example again, it is clear that as they open up their economy to freer movement of capital, they have to cede monetary authority in order to maintain their fixed exchange rate. This is one major factor in the accumulation of U.S. debt by China. If they wanted to exert a more independent monetary policy, they would either have to be more restrictive in managing capital flows (i.e. less exports to the U.S.) or abandon their fixed peg to the Dollar.

The second trilemma comes courtesy of Dani Rodrik, a Turkish economist at Harvard. Rodrik suggests that the world economy is subject to the following: we cannot simultaneously achieve a deeply integrated global economy, maintain national sovereignty, and operate democratic governments. We can only achieve two of the three at any time. This argument appears to hold true. If we want advanced globalization while maintaining the nation-state, governments would have to forgo much domestic policy - national policy would be focused on policies which enable global economic integration (this appears to be the general direction today, in my opinion, fueled by financial elite corporatism). The second choice would be to pursue globalization while protecting democratic principles. Such an option would require a global government which could act in the interest of the entire world under a democratic framework. Third, we could maintain democratic government and national sovereignty while settling for less global economic integration. Rodrik suggests that this is what the Bretton-Woods system sought to achieve.

So, in summary, trilemmas provide cool thought experiments. These two are interesting and are good to keep in mind when attempting to understand the working of the global political and economic system.

Twenty-Five Days

Well, it looks like it's been twenty-five days since my last post. That's pretty bad! My excuses aren't necessarily that great, but it's been a combination of three factors: a) busy work/personal life stuff, b) getting more up-to-speed on local issues/politics, and c) reading some books.

In the meantime, Sen. Evan Bayh (D-IN) announced that he would not run for re-election. This was a bit of a surprise and big news here in Indiana. Bayh timed his announcement well with clear knowledge that no Democrat would be able to get enough signatures to have ballot access in the primaries. This will allow the party insiders to choose the candidate rather than the electorate.

I truly do hope to post more regularly going forward, but I am undecided on how I plan to focus my efforts. I have some desire to focus on more local issues - especially as the 2010 election cycle ramps up and I get more involved with the local LP. This blog may not be the best outlet for that. The national/global/economic scene always interests me, but I probably won't churn out content as frequently and would prefer to focus on analytically-driven essays rather than the news cycle.

I'm open to all comments, feedback, and requests... I'd like to thank everyone who frequents the site and enjoys my ramblings.

A Libertarian View Against the Banks

There has been much ado over bailouts and socialism, Wall Street and Main Street, greedy bankers and noble capitalists, and a myriad of other related catchphrases and ideological positions when it comes to a discussion of the state of our financial system over the last year and a half. The debate rages on as today former Fed Chairman Paul Volcker testified before the Senate Banking Committee and with Barack Obama's recent call for a new tax on banks. Volcker has suggested a ban on proprietary trading for certain banks. This is a modified reinstatement of Glass-Steagall which served to separate standard commercial banking from hedge fund like behavior.

Lately, the conservative mainstream has taken to siding against such reforms. Typical free market rhetoric has led the way. It's been suggested that a ban on prop trading would over-regulate the banks and inhibit growth. We also hear the usual arguments against corporate taxes which state that it such policies only hurt the end consumer. I'd like to offer an alternative point of view on this subject that I think libertarians (and Libertarians) should consider supporting. I'll present my logic one point at a time.

1. Our System Encourages "Too Big To Fail"

This is a complex and very difficult issue. My free market ideals support a position which would say that companies can engage in any behavior they want and get as big as they want. They should be able to do this so long as they do not engage in fraud and/or stealing. The problem with today's system is that fraudulent behavior is supported. Banks can engage in expanding the money supply at will via credit creation in our fractional-reserve, fiat monetary system. I recognize that there is a legitimate debate to be had on the degree of fraud that such activity constitutes, but banks are allowed (and encouraged) to extend their liabilities well beyond their liquid assets. This creates an environment which is recipe for Too Big To Fail.

2. The Federal Reserve Further Enables Such Behavior

The Federal Reserve is the watchdog of the banking system. Large institutions have a direct line to the Fed in the primary dealer relationship. The liquidity provisions which the Fed has created over the last two years has not only expanded its balance sheet, but it has allowed these large banks to trade potentially risky assets for cash. This strengthens their reserve asset positions artificially and allows for further credit expansion. In the case of the last year, credit expansion has been swapped for asset speculation via proprietary trading.

3. Too Big To Fail Presents a Hazard to the Broader Economy

I wish I had a dollar for every time I've heard Tim Geithner, Ben Bernanke, random talking heads on CNBC, or any other person in power discuss why we had to bail out AIG. I understand their point of view. Most Americans who were opposed to bailout frenzy probably do not truly grasp the meltdown we would have experienced. No one can say definitively how bad it would have been, but it would have been painful. I would posit that Too Big To Fail would not exist in a true free market. That is an ideal which is too far from reality. Poor investments should be liquidated but are allowed to persist and grow in a bubble economy. This should be prevented.

4. Proprietary Trading Serves Marginal Economic Value and Enhances Too Big To Fail

Some large banks also serve as market makers by providing liquidity to investors. This legitimate role was developed long ago to fill in the gaps in the market to make it easier for investors. (More on this in a future post.) However, market making has been extended to significant trading. This is gambling plain and simple. I am not opposed to gambling, but it is important to understand that it serves no economic purpose other than speculation. When several large banks trade in the markets for speculative purposes, they create counter-party risks between each other. So, large banks (and other financial institutions) which participate in such activities ultimately enhance Too Big To Fail regardless of their direct participation in commercial banking. (For more detail, read this at Naked Capitalism.)

5. Too Big To Fail Risks Should Be Insured by Too Big To Fail Institutions

There has been a lot of arm-wringing that certain large banks already repaid their TARP money and should not be further penalized with a new tax. I disagree; although I would not position this policy as a tax. The government has enabled and continues to support Too Big To Fail. This should be ended. However, in the interim, this continues to pose a systemic risk. Failure should not be covered by taxpayers. As the FDIC collects a tax (fee or insurance premium) to build its reserve fund to address failed banks, so too should the government collect a similar tax on Too Big To Fail institutions to protect the taxpayer. (There is also a legitimate libertarian debate against the FDIC, but we'll save that for another post as well.)

It is not a popular position for libertarians to support government intervention in the markets. This is not the issue at hand. We must recognize that there is a close relationship between Washington and lower Manhattan. Our economy has been transformed over the last two decades to one built on financial engineering underpinned by credit expansion and cozy corporatism. This must come to end. It will either end by implementing policies which unwind it carefully or with a spectacular crash which will make last the last year and a half look like a walk in the park.

Obama's Second Chance

The President "did something unusual" today as he engaged the opposition at the Republican GOP House Issues Conference. I caught bits and pieces on the radio and television, and I plan to record and watch the event in its entirety over the weekend. I have to admit that I'm a bit impressed with Obama on what I've seen/heard thus far.

The GOP House delegation invited Obama for a Q&A today in Baltimore, MD, and the cameras were rolling. In what became an American version of Prime Minister's Questions (of which I am a big fan), Obama took questions from GOP House members. A bit of political wrangling mixed with solid debate led to a few honest answers from Barack Obama which put his intelligence and oratory on display without a teleprompter.

From what I've been able to dissect thus far, both sides scored some points. But, to me, while Obama toed the line between playing politics and denouncing politics, he scored some big points tonight. This is the Obama that I favored over John McCain. This is the Obama I wished we would have seen more of in the last year.

Let's be clear. I'm no huge fan of many of Obama's policies. Admittedly, I've always had an open ear to his anti-Washington populist message. Let's also be clear that I'm not so naive that I'd immediately assume that he has changed. However, his change of tone since the election of Scott Brown opens the door for a second chance.

The President now stands at a crossroads. Despite a poor State of the Union Address and a poor record of deficient action as it is measured against his populist rhetoric, his personality affords him the opportunity to prove Americans (like me) wrong. I'm skeptical of his commitment to cooperation and bipartisanship, his stance against the financial elite and powerful lobbies, and his willingness to support true reform and budget control. I'm very skeptical.

Actions speak louder than words. Let's watch.

Citizens United Decision and Free Speech

The Supreme Court issued a significant ruling this week on the subject of campaign financing. It is a complex subject and the opinions authored by the Court illustrate this complexity checking in at 183 pages (read here if you dare). I have read most of them and will offer my thoughts.

In the 2008 election cycle, a group called Citizens United produced a film called Hillary: The Movie which was apparently quite an unfavorable depiction of the Presidential hopeful. Citizens United intended to distribute the film as an on-demand pay-per-view on DirecTV. The commercials which supported the film were deemed an "electioneering communication" by the U.S. District Court of the District of Columbia and the film was not shown. Citizen United is a non-profit 501(c)4 corporation which has special non-profit status in that, unlike standard non-profit 501(c)3 charitable corporations, they can participate in the political process via lobbying and and campaigns. If this sounds complicated already, then welcome to the world of campaign finance in the United States.

This decision set up the Supreme Court battle which was decided on January 21. In what appears to be a unique decision, the Court decided 5-4 in favor of Citizens United overturning precedent in previous cases and ruling parts of the Bipartisan Campaign Reform Act (McCain-Feingold) as unconstitutional. The effect of this decision is that corporations (and unions) may now use unlimited funds directly from the general treasury to engage in electioneering communications. However, such funds (still) may not be used to contribute directly to candidates or to other political committees (political parties and political action committees known as PACs). Further, contribution limits and regulatory disclosures are left unchanged in the decision.

An electioneering communication is one that clearly advocates the support or defeat of a particular candidate (follow the link above to get a complete definition) before an election. Corporations and unions were previously prohibited from such communications, but no restriction existed for individuals or various groups such as political committees or "527" groups. This nuance is essentially what led the Court to its 5-4 decision. They felt that Citizens United should not be prohibited from electioneering communications as it restricts free speech and argued that any relaxation of the prohibition must lead to the sweeping decision they ordered.

Justice John Paul Stevens authored the dissent. He lambasted the majority on two key points. First, he felt that the majority overstepped its bounds in the tradition of the Court by providing such a sweeping decision which essentially overturned two previous decisions and a major piece of recent Congressional legislation. Second, he felt that the consequences of allowing corporations to engage in unlimited spending on electioneering communications would be detrimental to democracy and inconsistent with the Founders' vision. Justice Antonin Scalia offered a concurring opinion which focused largely on a rebuttal to the dissent's view of the Founders' intent.

There is a lot of big money in politics. Certainly, the electorate is aware and skeptical of how big money can lead to big corruption. It will be interesting to see how this ruling will change the political landscape of the 2010 elections. The fear expressed by those who disagree with the Court is that this will lead to more corruption and allow corporations to dominate the political discourse. A more philosophical opposition to the decision is on the nature of corporate personhood.

I am not going to devote a lot of effort here to the debate on corporate personhood. However, briefly, we must recognize that corporations engage in contracts, can litigate, pay taxes, and are subject to criminal, civil, and financial liability. Also, corporations are ultimately comprised of individuals. This allows for an interesting tangent of debate which I will not pursue. I will point out that limiting the free speech of media corporations or even non-profit corporations would seem to be anathema to most. I would find it difficult to objectively draw that line to prevent large for-profit corporations from exercising free speech.

Money gives power in many aspects of society. There is no doubt to that. Corporations have a lot of money and thus have a lot of power. Power in the political discourse allows for views and opinions to be expressed, candidates to be laud and vilified. Exercising power also comes with a price. While most of the electorate will be unlikely to monitor great sites like OpenSecrets.org to determine who is paying for campaigns and ads, the disclosure requirements of the FEC enable such organizations to educate and inform. The media, advocacy groups, and interested individuals are empowered more than ever by the internet to report perceived improprieties and report on the relationship between money and politicians.

Our system is not perfect and democracy is a dirty business. Corruption will always exist, but it is the duty of the electorate to be informed and educated in a functional democracy. We cannot force this upon voters, but that should not force us to restrict free speech. This may lead to more corruption or at least the perception thereof, so interested opponents should take steps to counter this.

Be active and hold your elected officials and candidates responsible for their actions. Vote with your dollars if you disapprove of a corporation's political activities. Sell their stock. Boycott their products. Tell others to do the same. Last, but not least, be an advocate for better representation in government. Members of the House today represent about 700,000 citizens on average. Increasing the size of the House would lead to greater accountability, more equitable representation across the States, and less money involved in each race. This would be a far better remedy than restricting free speech.

Thoughts on Scott Brown

I suppose I wouldn't be much a of a political blogger if I didn't comment on the Scott Brown election. It's certainly the hottest topic in politics today and will have implications on policy and action in Washington until November. In order to take a closer look at the real story behind the election, I'll turn to the data. Rasmussen Reports conducted exit polling last night and I've broken down some of the results in the table below.

Source: Rasmussen Reports

I heard on the radio this morning that health care was the most important issue to voters in Massachusetts last night. We've all heard the talk the Brown's election will likely lead to the end of the currently contemplated health care legislation. This is pretty much true. But, interestingly enough, Coakley had a seven point edge over Brown amongst voters who cited health care as the most important issue. This translates to 30% of the electorate voting for Coakley because of health care and 26% voting for Brown because of health care.

It is more interesting to me that Brown held a five point advantage for voters who believe the economy is the most important issue. This is a marked difference from the 2008 election where Obama dominated McCain 61% to 36% for the 63% of voters who named the economy as the most important issue (visit the link, select Massachusetts as the region and issues for vote preference).

Given that Brown voted for and supports the existing state health care plan in Massachusetts, it seems to me that the economy is the big deal here. (By the way, Brown did a pretty solid job of explaining his views on health care on the Today show this morning.) Brown also had a landslide victory over Coakley amongst the 11% of voters who said that either national security or taxes was the number one issue. Notably, his edge from this small constituency alone accounts for his overall margin of victory.

I see this as a true indication that Obama's support on economic issues has horribly deteriorated. He spent a large amount of political capital on bailouts and stimulus. He has attempted to claim success on the basis of stock market gains and modest GDP growth in Q3. Wall Street and the talking heads care about this; Main Street does not care. Most Americans see huge debt burdens, foreclosures and unemployment. To them, Washington has failed and Massachusetts has sent the message.

When Magic Bullets Fail

I recently read an article written by former Fed economist Richard Alford over at Naked Capitalism. He focused his criticism on the zero interest rate policy (ZIRP) currently deployed by the Fed under the watch of Chairman Ben Bernanke. There has been increasing noise surrounding ZIRP and more mainstream suggestions that interest rates were too low for too long between 2001 and 2006.


Alford's article gets into quite a bit of detail, but it is worth a read if you enjoy geeky economics stuff. Mainstream macroeconomists believe that the economy can be explained and managed with mathematical formulas. In fact, the formulas are really quite simple and do not capture the dynamics of the millions of "irrational" actors therein. One favorite is the Taylor rule which suggests a target for the Fed funds rate - the key interest rate set by the central bank. Alford points to a Taylor op-ed which states that rates were too low from 2002-2005.

Bernanke has suggested that rates necessarily had to be low (and must stay low) to fend off the threat of deflation. When analyzing Bernanke's definition of deflation, however, Alford suggests deflation was never a threat. Thus, interest rates were lower than they "should have been" for no good reason.

I don't believe that the Fed should be setting short term interest rates or any interest rates at all for that matter. It is fun to watch the various economists who think they have a magic bullet to optimize the economy take shots at each other. None of these men (or women, but mostly men) can outsmart the market dynamics of a multi-trillion dollar economy. All of these men think they are smarter than you. What is worse is that such hubris causes damage.

The Austrian school of economics (which is not accepted in the mainstream) teaches us that low interest rates lead to malinvestment. Malinvestment leads to over-production, inflation, and asset bubbles. These factors ultimately collapse when the rates are raised or, worse, when credit expansion leads to bankruptcies and unemployment.

The Fed has implemented disastrous policies for decades. Big Wall Street institutions who benefit have created a system to lobby and support policy makers in Washington. Our Congress, Executive Branch, and the Federal Reserve have been all too willing to play right along.

Justice for Balloon Dad

The entire "balloon boy" spectacle was a bit of a waste of time in my opinion. Although, I do admit it was an interesting story. I didn't know about it until a day later and found the family's morning interviews to be a bit disturbing. In November, balloon boy father, Richard Heene, plead guilty to falsely influencing authorities (that's an interesting charge) and began serving his 90-day jail sentence this week. You can read a recent story here from the LA Times.

This story now strikes me as interesting since Heene has come out saying that he only plead guilty to avoid putting his family through a trial and for fear that his wife could be deported. I don't know all the ins and outs of this particular legal situation. If I tried to research it, I'd probably never get around to writing this. But, it just does not seem right. Heene might be innocent; he might be guilty. If he truly believes that he is not guilty and copped a plea out of convenience, then I think something is wrong with our justice system.

I recognize from the article that the prosecution could choose to go forward now that Heene has made this statement. It seems that they will not. I also heard it suggested that Heene also adopted this strategy to avoid the legal fees that he might incur if he were to fight the court battles for himself and his wife.

It seems unjust to me that the legal system has evolved to a point where anyone avoids litigation or defense due to fees. The Sixth Amendment protects citizens by providing what can basically be described as a fair trial. The right to a fair trial is considered widely to be an essential feature of a modern society. The notion of a fair trial may be considered to include a "sufficient and equal amount of legal counsel for all parties" - this is not in the Sixth Amendment.

I do not believe that all lawyers should be considered a public utility. Clearly, some lawyers are better than others and they should be able to command a higher wage for such talent. However, when it gets to the point that wages and other court costs are so high that the average citizen or small business can't compete, then something is probably wrong.

I don't have any solutions on this one. I haven't thought about it all that much. Just seems like interesting food for thought...

Tim Geithner Must Resign

It is now long overdue. Treasury Secretary Timothy Geithner must resign his post. A story broke earlier this week on Bloomberg which details what appears to be an attempted cover-up by the Federal Reserve Bank of New York and AIG. Let's take a quick trip in the time machine.

On September 15, 2008, Lehman Brothers filed for bankruptcy. This triggered a freeze in the credit markets, which, in turn, exacerbated a brewing crisis at insurance giant AIG. The Federal Reserve stepped in the next day with an $85M loan facility which effectively nationalized the company. This was not the end of the government's largess. Additional credit lines were created by the Federal Reserve and TARP money was used to provide a capital infusion. Tim Geithner was President of the NY Fed during this time.

Two key controversies emerged over the following months. First, AIG awarded large bonuses to employees despite the massive failure of the firm. These retention bonuses were executed despite populist discontent and anti-bonus rhetoric from Obama. However, Geithner effectively shrugged his shoulders and said nothing could be done. Second, AIG settled credit default swap contracts at par (one hundred cents on the dollar). This was controversial since AIG was effectively bankrupt and the counter-parties would likely have received much less in either bankruptcy or any other rigorous renegotiation. Again, Geithner effectively shrugged it off.

It was this second issue which is at the center of the aforementioned Bloomberg article. It has now been reported that the NY Fed suggested that AIG might limit its disclosure in regards to the payouts. Darrell Issa (R-CA) obtained correspondence as part of his investigations on the issue as a member of the House Committee on Oversight and Government Reform. Issa has made the rounds this week on various news shows and penned an op-ed in the Huffington Post. More details and commentary on the story can be read here at Zero Hedge.

The White House has already begun its defense of Geithner (see the press briefing from today). Essentially, the argument is that (so far) none of the emails involve Geithner directly and that he was not aware of the details. However, he was President of the NY Fed. This happened under his watch. He is responsible.

Geithner has used these incidents and the rest of the financial crisis as a call for more government power and control. This should not be a surprise. He is a firm believer in the partnership of government and big business. His first job out of school was with Kissinger Associates. This is a firm founded by former Secretary of State Henry Kissinger, which employs high ranking former government officials and advises large multinational corporations. It is not hard to connect the dots that such a firm is paid big money to use its connections and knowledge to achieve public-private partnerships. Their number one goal is to exploit and expand corporatism. He continued on to serve in various roles in the Treasury Department in the Bush (41) and Clinton years. He then worked for the IMF (where he misreported his taxes) and finally the NY Fed. His entire worldview is based on corporatism and the significant role of the banking elite in world affairs.

Geithner will not change. There are likely more skeletons in the closet. He will continue to defend his actions since he believes that the government and large financial institutions must work together. In times of crisis, this means that the rules don't matter and taxpayers don't matter. His rhetoric may state otherwise, but his actions singularly serve the financial system. He embodies corporatism and cannot survive as Democratic populism strengthens while unemployment stays above 10%. Obama will ultimately have to make a choice between Geithner and his base. While I believe that Obama will continue to kowtow to the financial powers-that-be, he can make Geithner a sacrificial lamb to serve the progressives taste for blood. For this reason, my disapproval of his policies, and his reckless arrogance, Geithner should resign immediately.

Housekeeping

I am going to write another entry tonight (or at least start it), but wanted to get some housekeeping out of the way first. I haven't been writing much lately. I have a myriad of excuses, but it's time for action instead. So, I'm hoping this will kick off some regularly scheduled writing going forward.

A fair bit has transpired over the last couple of months. Health insurance reform is close to passing, although it is not entirely a forgone conclusion. 2010 is here which means elections for the House and over 1/3 of the Senate. We've had an attempted terrorist attack, more frequent Ron Paul sightings in the mainstream media, plenty of news on the economy, and much more.

The Indiana General Assembly is in session where property tax caps and ethics reform will be at the heart of the debate. The Daniels administration has continued to make cuts as revenues have failed to keep pace with the budget.

I'll cover all this and much more over the coming weeks. Enjoy!