how the US is like a working mom - thinking through tax enough already

or TEA, as the popular tea-party acronym goes. lowering taxes for jobs is on everyone's mind. so let's forget for the moment about roads, public transit, hospitals, schools, universities, and defense and look at the incentives.

humans of course respond to incentives, and constantly look for ways to cut corners. that's ok, we all do it, and so changing tax rates to make people behave in a certain way is a reasonable path of action. now what if i am at the receiving end of such changes? if i had a steady high income from a business, let me just think through what i would do, given different tax rates.

1. 
   do you want this
   Éminence Grise
   i pay low taxes: great! i love it! i take my cash home, pay a little tax and spend spend spend on lovely things like champagne, travel, and big cars. maybe i always wanted to have a boat or a private jet? in any case, my money goes to the income of luxury companies that make things i like. their employees work there to have the big name on their resume, not for the money, so they don't make that much but oh well.
   
   if you design mass-produced items, cell phones, laptops, TVs and the like, or advertise cheap goods for the mass market or you work in agriculture: sorry, i've got nothing for you. you'll have to wait until my money trickles down to you from those underpaid makers of my luxury goods. oh wait, they are underpaid, so it won't. sorry, at least i tried.


2. 
   or this?
   ubergizmo
   you tax me more: aaaargh!!! now i have to devise ways to keep that fat wad of cash that comes my way every month. what to do? oh, yes deductibles. let's see. company car. check. luxury office. check. ... ok, if i must, i'll reinvest some of it into the company, buy some new laptops and office chairs, hell, maybe i'll even hire someone. and to find someone to hire in a competitive jobs market, i have to pay them more. now i'm producing more. how do i sell it? perhaps hire an advertising company and make my products a little cheaper. wait, now i don't make so much money, so maybe i'll hire a consultant to help me streamline the production process, buy some new machines to automate. now i produce even more. hm, maybe i can find new markets in asia?

see what's happening here? the incentive is not the tax, it's the deduction. i want to avoid taxes, so that my income stays in my company and under my control, so that i can one day pass it on, for cash or to my kids. in the process, i have jump-started a whole host of business activity, while providing a product to a mass market for a good price.

you be the judge which kind of world you want to live in. i for one would vote for option two. and to everyone who claims that high taxes make companies go bust: no company pays the nominal tax rate, as everyone knows deductibles. it's not the government that makes companies go bust, it's competition with more efficient companies (which, incidentally, operate under the exact same tax conditions).

so to republicans and tea-partiers who claim that low taxes on high incomes create jobs, please remember that the bush tax cuts have been active all along. see how many jobs that gave us? low taxes only help to take the money home and put it on a big pile, not to reinvest it. and to those who say we can't afford the deficit, let me answer with a simile:

lady liberty
work it. mom!

the US is like a working mom who, after a busy time at work, finds that her company struggles in the downturn. she comes home unemployed and goes through her finances to see what her options are. after all, she has put aside some money every month for such a case while she still had a job. to her horror, she finds that all her savings have been spent on booze and coke by her alcoholic ex-husband who still likes to hang around. but the kids need to be clothed, fed, and driven to school, and so our formerly working mom has no choice but to take a loan on the house to get by. and throw that good-for-nothing ex out of the house. in 2012.

conservative reformers vs. left-wing conservationists

Seeing recent election results in other countries, does it appear that Europe's conservatives are the better socialists? At least that's what the recent New York Times article, "In Bad Times for Capitalism, Socialists in Europe Suffer" says.

In 1957, the German conservatives went into the federal election with the slogan "No Experiments". This was at a time when massive economic changes made every political move an experiment anyway, but I digress. In 2009, the slogan "We Have the Strength" - intriguingly, a loose translation of Obama's "Yes We Can" - hands German conservatives a big win.

"No Experiments" can still be heard from conservative politians, although the failure of financial markets makes the need for reforms obvious. Record bailouts, carried by conservatives and liberals alike, show that this need is recognized and met. What then makes "No Experiments" so successful?

Germany has turned grayish-black

To quote the NYT article,

The Socialists have, in this contest, become conservatives, fighting to preserve systems that voters think need to be improved, though not abandoned.

This statement makes some big assumptions on what voters think, but be that as it may. Could it be that socialists have turned from reformers into defenders of the social support systems' status quo because they were gullible enough to allow conservatives to tell them what not to think in the wake of the collapse of the eastern bloc? Not to speak of the unrelenting onslaught of the neo-liberal reform agenda that seems to preclude any extension of these systems since Reagan and Thatcher dominated the west. After conservative outrage at the thought, German Social Democrats (SPD) excluded cooperation with the Left Party (a coalition of western socialists disappointed by their party's right-shift and eastern post-communists). By doing this, the SPD made themselves an impotent appendage of the conservatives. At the same time, they failed to recognize that, 20 years after the fall of the Berlin wall, conservatives give post-communists much less credit for their ability for democratic reform than they gave their own former Nazi members only five years after the war.

The NYT article further quotes Giovanni Sartori as saying

The Socialists can’t adapt to the loss of their basic electorate, and with globalism, the welfare state can no longer exist in the same way

This statement is, however, based on the assumption that society as a whole values profits higher than lifestyle. Seeing as, even in the boom before the bust, only the highest 10% of German incomes saw an increase*, the purported view that socialists are losing their basic electorate is a myth. A bank teller is no less a worker than her manual labour compatriot, even though she might over-ambitiously vote like her bank's CEO. The real question is, through what deception do conservative parties manage to coax a majority to vote against their own interests?

To reclaim their voter base, left-wing parties need to liberate themselves from the denkverbot/crimethink laws set by conservatives and find common ground with partners in other parties everywhere. They need to build their own forward-facing reform agenda adapted to modern conditions, giving the common man chances to profit from the efficiency gains of globalization just as much as the corporation. The discussion among socialists in the coming years will be interesting. It remains to be seen whether the right wing of the SPD will relinquish the power they have easily.

Food for thought, if corporations sell movie dics so cheaply in east asia, why can't you buy them at asian market prices over the internet and play them in your player in the west? (Technical answer: because they have a region code. How is it that region codes are ok?)

* Sources:
Einkommen stagnieren - nur die Reichen werden reicher
Die Mittelschicht schrumpft
Studie: Aufschwung an meisten Haushalten vorbeigegangen

as healthcare debated, oil lobby chips away at restrictions

under the green banner of energy reform, the oil industry is at it again, as if to demonstrate that no-one should ever take their eyes off the ball, ever.

today i saw another article of the "did you know" type, linked by a friend (thank you). this time, it is about the dependence of the US on foreign oil. the avid reader will know that I am sceptical of such articles.

consequences of oil
production (canada)

i feel that it's worth putting this article in perspective. it purports that restrictions on US domestic production unnecessarily drive up cost (and US trade deficit). in truth, if those restrictions were lifted, the savings would be in the sub-percent range, while the environmental and health costs would be enormous. a large part, as the graphics shows, is already imported from canada, where, the environmental damage caused by the extraction of oil from tar sands is readily visible.

at the same time, advances in efficiency are made out to be noticeable, when in fact they are more than eaten up by the insatiable hunger for auto-mobility, always-on electrical devices, and air conditioning caused by America's love affair with living in the deserts of the south. (not to mention the consumption of limited water supplies.)

at the end of the article, the rhetorical question is asked

Until we find the renewables capable of replacing fossil fuels, oil and gas will remain the world's most important commodities, meaning the US will continue to import great volumes from overseas. But just how reliant is the US on the importing of foreign oil?

so as take-home message, are we to understand that the oil industry is too big to fail? seriously???

this, by the way, is one of two similar articles on the main page of the same online trade magazine right now (the other talks about how US trade balance would be ok of it weren't for those pesky oil restrictions). while they seem to provide factual information, they downplay some and talk others up, so all they really do is contribute to the smoke-and-mirrors, drill-baby-drill campaign of the oil lobby.

do you think the articles are informative and harmless? well, let's compare this to a situation we are better acquainted with. say you swing by your pharmacist's on the way home to get some cough-drops, and since you'd be bored on your train ride, you pick up their free magazine. in it, you find a gushing article about this new drug for your cough. back at the pharmacists the next day later you ask about it, and find that it is ten times as expensive as your cough-drops. do you really believe it will cure your ailment ten times better? well, we all know that these articles in trade magazines are written, and paid for, by marketing companies. so why should we be more trusting when it comes to reading articles on subjects that touch on the political?

is Jon Stewart wrong on the bailout?

let me start by saying that i really enjoy watching Jon Stewart's Daily Show. it is usually a well-written and well-researched show, as the recent well publicised exchange with Jim Cramer showed. as far as i'm concerned, Jon Stewart is on the right side of the debate ethically - and he's entertaining and funny and that counts for something in the difficult business of getting more people interested in the news.

i want to criticise one thing that has been bugging me because i think it is beside the point and it distracts from the real problem. In his interview with Gwen Ifill at the end of January, for example, at 5:25



Jon Stewart, perhaps jokingly, proposes to just use the bailout money to pay consumers to pay off their (bad) loans. although this sounds like a deceptively simple and workable idea, so much so that i've heard it in private conversation repleatedly, i believe it will not work within the current monetary system. accordingly, Gwen Ifill politely told him she'd get back to him on this. unfortunately, it seems she didn't, because in march Jon Stewart proposed the same thing to Joe Nocera, at 3:25.



Joe Nocera replies that there is so much of it (the debt). this is only partially true.

in fact, banks produce money out of thin air by lending. two valuable items are created, the loan and the promise of the borrower to repay it. if loan #1 is now spent and paid into another bank by a seller of goods, a fraction of this, often 10%, can be used as deposit against another loan of nine times that, i.e. nine tenths of the original loan, and so on ad infinitum.

(this is a geometric series that converges to ten. as the bank only needs to have a 10% deposit against the original loan, the original deposit is mulitplied ninetyfold in the long run. in the eurozone, where the required reserve ratio is only 2%, this factor increases to 2450. the uk has a "voluntary" reserve ratio system. you can imagine what that means.)

since the money flows in a closed system, the amount of money is increased. conversely, if a loan is payed back (including interest), money is destroyed. so Jon Stewart's idea is counterproductive because it actually removes money from circulation and exacerbates the current liquidity crisis, as most companies depend on fresh credit to keep going.

or, if you want to look at it this way, Jon Stewart's idea falls short because for it to work, the entire system would have to be changed. i don't think this is likely to happen. now would be the moment to do this and i have heard nothing of it.

on the contrary, the the banking bailout injects money into the system twofold: by taking out loans from the banks (and promising to repay them) and investing that money back into them.

i believe Jon Stewart would look better accepting that this is the only thing that works within the current system, or propose a better system instead.

---

the current system is described in a pdf document by the the Federal Reserve Bank of Chicago, for a more entertaining take on it, have a look at this video.



more Jon Stewart clips on the subject can be found by searching "bailouts" on thedailyshow.com.