A new Marshall Plan is in order

While our nation debates the merits of a possible new, New Deal I find myself wondering why we don't instead consider the merits of a new Marshall Plan.

The Marshall Plan involved giving massive amounts of money and resources to people who in many cases had just tried to wipe out the entire free world. In hind-sight, it's easy to see that the Marshall Plan enabled the "economic miracle" that stabilized virtually all of Europe by providing almost universal prosperity to all western European nations. Funny thing, prosperous people tend to not engage in suicide missions bent on global destruction. All this is clear to us today, but it had to have seemed outrageous to most people at the time. I wonder how the American taxpayer felt knowing his taxes were going to help rebuild the nations that had just a few years before nearly conquered us. But would anybody regret it today? Would anybody say it would have been better to keep Europe in poverty, wounds and resentments festering, waiting for the next dictator to come along and promise redemption against those who had vanquished them to this miserable state? Without Europe and Japan as trading partners, the US almost certainly wouldn't be as prosperous today, to say nothing of how much more miserable those nations and the rest of the world would probably be.

So the question is why are we not considering a global Marshall Plan? The cost of our global War on Terror must certainly have run well into the trillions at this point. What if we considered investing directly in the economies of places like Iraq, Afghanistan, or Pakistan? Rather than spending trillions to run military operations in these places, why not spend trillions to raise the populations into a level of prosperity that would make it impossible for terrorist organizations to recruit. If this seems naive, why is it any more naive than thinking that Germany in the 1940's could turn from its long history of militaristic brutality into a peaceful and prosperous nation? Let's not whitewash history here, the history of Germany, like nearly every western nation, is one of regular violence and tensions, both within and without, culminating in decades of aspirations to world domination in the world wars. Why should we have thought that they could settle down once they achieved a little prosperity? Yet that's exactly what happened.

What if Pakistan and Afghanistan could share in the growth that China and India are experiencing? And what if that growth could be further accelerated to the levels of growth experienced in the decade or two after 1945 in western European nations? Our military might be unable to find bin Laden amidst all the warring tribes in Pakistan and Afghanistan. But if these countries were prospering, the military wouldn't need to find him...the real estate developers would kick him out of his cave to make way for a new time-share development in the mountains. The crazed young men out to conquer the world for Allah would be venting their testosterone during football matches after class just like young men do in any prosperous nation.

The crazy thing is this kind of investment probably wouldn't cost any more than we're already spending to try to keep order militarily in these places. And furthermore, the rapid spread of prosperity to every nation on earth as rapidly as we can spread it would also serve to raise living standards in America as well. It's no secret that one of the biggest threats to the American middle-class is the off-shoring of countless jobs to other countries where work can be done by far more desperate people in far more inhospitable conditions. How come nobody notices that we're so worried about jobs going to Mexico but there doesn't seem to be the same concern about jobs going to Canada? Of course this is because Canadians live as well as we do in the States, so there is no incentive for employers to seek lower labor costs there. The fundamental difference is prosperity.

A common justification for countless policies in favor of the wealthy of the last few decades has been the statement, a rising tide raises all ships. Don't the people using this statement realize the absurdity of this statement in that context? "The tide" must certainly be the mass of humanity, while the ships are the wealthy who sit atop them. To raise the standards for the wealthy and expect this to automatically raise the living standards for all is as backwards as thinking that by lifting boats out of the water that the water level will automatically rise to meet them. We have seen in the last few decades that this trickle-down approach does not work. The wealthy have seen their wealth grow at a tremendous rate, while the bottom half of society has barely seen their incomes or net worth rise at all. By contrast, the policies enacted after WWII, both in the US and abroad, were focused on allowing the masses to prosper and raising the living standard for as many people as possible. The result was an economic boom throughout the world. And the wealthy did not suffer, but benefited tremendously as a result. I'm sure an examination of wealth among the richest members of society during the decades after WWII would reveal that the growth of their wealth was scarcely any different than the last few decades.

It's time we take this to the next level. If we want to emerge from the current economic crisis stronger than we were going into it, then the only way to do that is by reimplementing the Marshall Plan. We must invest in every nation that will accept our money, including--especially--our enemies. The only condition on the money must be the adoption of basic labor and environmental standards to ensure that the investment raises living standards for the greatest number of people possible. Only by raising the tide can we keep all ships from running aground.

Are taxes taking more than your employer?

I doubt it.

I know people who begrudge every dime of taxes they pay. But while they whine up and down about all the taxes that government takes out of their paycheck, they don't seem as upset about what their employer takes out of their paycheck. Of course, what the government takes is clearly visible on the paycheck, while what the employer takes is not nearly so visible. For example, I work for a CPA firm that charges $75/hr for my work. I only receive about a third of that. So one could argue that my employer is keeping 67% of the money that I'm earning for the company.

Of course that would be absurd because my employer has to pay all sorts of overhead...advertising, office space, insurance, etc. etc. Plus my employer also pays me for many hours that aren't billable. But really, is that so different than the government providing the overhead that makes the economy possible? The government pays most or all of the cost of our education. The government provides nearly all of the transportation and communication infrastructure that makes commerce possible. The government maintains order. It seems to me that government does just as much to provide me with gainful employment as my employer does. Why should I begrudge the government taking far less than a quarter of what I earn when my employer keeps about 2/3 of what I earn?

It's unfortunate that people don't recognize this obvious truth. Maybe if the government was able to take taxes from us before our wages show up on paychecks there wouldn't be so much resistance. Maybe this would allow us to raise the necessary funds for government to operate and get our nation out of massive debt.

Reagan/Bush NEVER cut taxes

As the Congress and Obama negotiate the latest economic stimulus package, one item sure to be debated is the size of "tax cuts". Maybe it's time the American people realize something: No President since Truman has ever cut taxes. Not Reagan, not Bush Sr, not Bush Jr, nobody. I say that because no President since Truman at the end of WWII has actually reduced government spending. The closest we've come in recent times was in 1989 when post-Cold War military spending cuts allowed us to increase government spending by less than inflation. Without actually reducing spending, we're not actually reducing the tax burden. So WE'RE NOT CUTTING TAXES, WE'RE SIMPLY DEFERRING THEM.

For three decades the government has been deferring taxes at a level never seen before. How much more can we possibly afford to defer? As the size of the "tax cut" in the economic stimulus program is debated, "we the people" need to realize, and remind our representatives, that we're not really talking about a tax cut, we're simply talking about how much debt to deal with down the road.

A New Direction

Just some ramblings on my reaction to today's inauguration...

-YES!! First of all, the end of the previous error could not have come soon enough. Obama's intelligence, willingness to entertain a diversity of opinions and ideas, and political pragmatism will be a welcome departure from the idiocy of the last 8 years. I don't know if Obama can undo the damage of the reckless policies (foreign and domestic) of the last 8 years (and in many cases much longer), but at least we have a new direction that can't possibly be as self-destructive as the path we've been following.

-Obama clearly set the tone for a new approach to the economy...an approach that should be a departure from the free-wheeling market idolatry of the last three decades. While recognizing the tremendous power of markets to create wealth and prosperity, he also recognized the potential for self-destruction in unregulated, unchecked markets. (If I could buy President Obama a good beer for that, I would.)

-In the pointed barb department, the most memorable line from Obama's speech was when he rejected choosing between our principles and our safety. The intent was clearly a condemnation of the pro-torture policies of the previous administration. I'm glad he was clear on that (as clear as you can be at such a diplomatic moment while trying to be a bi-partisan leader). If we want to be recognized as a moral authority in the world once again, we must renounce these tactics. We can not defend freedom with the same deplorable tactics as those who oppose it.

-The call for sacrifice. I'm glad Obama repeatedly used imagery of hard work and sacrifice. I heard a Republican commentator criticize the speech for not being "upbeat" enough, and that it should leave people with a "spring in their step." BS. Now is not the time for happy-go-lucky-everything-will-be-taken-care-of sentimentality. For too long Americans have been fed the line that if we just pay less taxes and go shopping with the extra money then everything will be alright. The current financial situation is the inevitable result of such foolish policies. As we go through this financial mess, a process likely to take several years, people must be willing to help each other out, to show kindness and charity toward one another. And we must accept that taxes will have to rise to pay for the reckless spending of recent years.

I'm cautiously optimistic, and that's about as optimistic as I've been about the direction of our country in my entire adult life.

Why the dollar must plunge to save the US economy

It seems like every day more money is being thrown at the financial crisis. Reasonable people worry about what this will do to the value of the dollar if people lose confidence in our ability to pay back our debts. With any luck it will destroy the value of the dollar.

Nothing will do more to bring jobs back to the US than when our unsustainably high global power erodes. It is inconceivable that an average American worker can be a hundred times more productive than an average Asian worker, but our current exchange rate requires it if we're going to have jobs for American workers in an economically competitive environment. Of course, the notion that a weak dollar will bring jobs back to the US is nothing new. The downside is that prices will rise as (artificially) cheap imports are no longer so abundant. Essentially the trade-off comes down to giving up new big-screen TVs in order to provide enough jobs for everybody who wants to work.

But then, there's the bigger picture. I can't help but think we're in a period similar to what Spain went through when it dominated the seas in the 16th Century. I've read in Galbraith's economic history about what caused Spain to recede as a world power. When Spain dominated the seas, ships full of jewels and gold were frequently brought into the country. The country quickly became the richest nation in the world. Once Spain had more wealth than any other nation, they realized it was more economically efficient to simply import goods rather than make goods themselves. Over time, two things occured. First, and most obvious, is the nation slowly lost wealth to other nations who actually produced goods. When the incoming treasure slowed, the overall wealth of the nation started to recede. But a second, and far more enduring, effect was that Spain lost the ability to produce things. The money couldn't keep coming in forever, and when it stopped Spain was no longer able to produce wealth for itself. I fear the same thing is occuring in our country. The best jobs and most lucrative money-making ventures are often in areas like sales and finance and brokering exchanges of property. People who create no real value, but simply move large amounts of money around, are generally compensated far better than people who actually create real products or provide real services. History has shown that such a system is unsustainable.

Our problem is not that our banks and financial companies might fail. Our problem is that we seem intent on propping up a system where moving money around is seen as a more valuable profession than actually creating things or providing useful services. Rather than throwing money at banks, we should be throwing money at artisans and tradespeople and doing whatever it takes to make apprenticeships a viable alternative again. We should be making entrepreneurship as lucrative as pushing papers for a big corporation (and the main way to do this is providing universal health care so people don't have to choose between starting their own business or being able to provide health care for their families). We need to tax the HELL out of trading securities and flipping real estate. Our current tax system imposes a lower tax rate on "unearned" income (capital gains and dividends) than on money that people actually earn through working. This can't be any more absurd. If I was trying to destroy a nation, then imposing a lower tax rate on unearned income would be a good place to start.

Of course, changing all this will cause all sorts of harm. A modest 1% surcharge on all stock trades would go a long way toward ending the speculative bubbles that have caused so much economic harm recently--and also start to pay for all the financial burden Wall St is currently passing on to the taxpayers. Of course, it would also cause stock prices to fall even further. But these are the trade-offs we have to make. We've been coddling the rich for so long that people have come to accept the notion that this is simply the way it should be. But we must change this status quo if we want the country to continue to thrive. We must stop rewarding unproductive activities more than we reward proctive activities. We must stop giving favorable tax treatment to unearned income. We must find ways to make it more lucrative to do actual work and provide a real good or service. If we are unable to figure out how to do this again as a nation, we'll go the way of every other failed empire that has fallen into this trap.

Why metals make lousy currency

As the government throws more and more money at the financial crisis, the cries of the gold standard folks seem to be getting louder. On the surface, the idea of a currency based on gold or some other precious metal seems sound. The notion of a paper currency that can be printed at will seems dubious at best. I don't read much about why metals aren't used to back currency, but maybe it should be more broadly discussed. I've actually arrived at my conclusion as to why metals aren't used as currency independently, though it's so obvious I'm sure professional economists are well aware of it. They just need to tell the public.

As best I can tell, the idea of a currency that is fixed in quantity is incompatible with an expanding economy. Throughout most of human history, economies really didn't grow...or at least they grew so slowly as to be imperceptible in a human lifetime. In such a steady-state economic environment, the idea of a currency of fixed, finite quantity makes perfect sense. However, the Industrial Revolution has changed all that. For the last two centuries, the global economy has experienced remarkable growth due to both increased productivity and surging populations. Nearly every year, the global economy and nearly all individual national economies produce measurably more goods and services than they did the year before (2009 may prove to be an exception...we'll see). If we were stuck using a fixed currency such as gold, this would require that products and services get cheaper and cheaper every year as a result. This should be obvious: If a fixed amount of money has to be used to purchase an increasing amount of goods, the only way this can happen is for the goods to get cheaper. So as a result, if somebody chooses to simply put gold under the proverbial mattress, the savings of this person would increase in value over time.

Now so far this probably sounds great to savers, especially savers who believe in bringing back the gold standard. But think about what would happen in such an economic environment where simply hoarding money is the most economically sensible thing to do. Investment in productive activity would severely diminish, of course! Why should an investor risk losing money by lending it to a business when they can simply stash their money away safely and watch it rise in value? Further consider that any enterprise they invest in is going to perpetually receive diminishing returns. While ACME Widget company might be able to return 10% of an investment the first year, the diminishing value of their product will reduce returns year after year. (Of course the company's costs would also decline, but if the profit margin remains the same, then return on investment will diminish.) Investing in productive economic activity becomes foolish in such an environment. Of course, this problem would quickly find a "solution". Once investment activity stops, or drops off dramatically, overall productivity of the economy will cease to improve. At this point, the value of goods would stop deflating...and hoarders of gold might be tempted to invest in productive activity again. Of course, the moment the economy starts increasing productivity, deflation would again set in and the best investment strategy would once again be to simply hoard gold.

For this reason, using a currency based on gold, metals, or any material found in finite quantities will doom an economy to zero growth in the long run. It seems counter-intuitive that the quality of gold that makes it so desirable to some as a currency--the fact that it cannot be created and it's quantity cannot be increased by any significant amount--is actually the quality that makes it terrible as a currency.

Ironically enough, the non-sensical central banking games we play now where money is created almost from thin air is actually the only effective currency for an economy capable of experiencing long-term growth.

"It's much better to underproduce than overproduce"

This evening on NPR I was listening to an interview of one of the auto executives at the big convention going on in Detroit. When asked about his company's failure to make enough of a particular model of car last year, he responded that it's far better to under-produce a product than over-produce. Most of their current troubles stem from over-production and having tons of unsold inventory. Of course, all of this is perfectly obvious. We have reached the point where it is is simply more profitable to not produce enough to meet demand, even though we have the capability of doing so. Producing enough of a product to meet demand will require producers to sell at a price just high enough to eek out a tiny profit. But producing less than enough allows producers to reap handsome profits because of the pricing power of scarcity.

But isn't the whole point of capitalism that it's the most efficient system for producing goods and services? But if capitalism rewards those who don't produce enough and punishes those who produce too much, then doesn't that mean capitalism is doomed to failure at the task of producing goods and services to meet demand? Of course, in a purely theoretical model, another producer can come along and fill in the gap by producing the same product. But we live in the real world, where patents and trademarks would explicitly forbid a competitor from doing this. If we're going to enforce patents and trademarks, and we're going to embrace capitalism, aren't we simply embracing a perpetual state of underproduction?

Update

Wow, I'm a real slacker as a blogger. I've been busy moving to California and haven't had a change to log in. When I just added the post about my comments to Marketplace, I didn't realize I hadn't posted since October. And I'm about to enter Tax Season and will be working 60+ hour weeks so I'm not sure how much I'll be able to get to this. Oh well. I was inspired while running to change the blog name to Free Markets and Good Beer, so I did it. Now I'll just try to keep adding interesting (to me, at least) thoughts as they come to me.

The move to California made me think about something. Dominant economic thought indicates that higher taxes will hamstring businesses and encourage them to go elsewhere. Yet upon moving to the Bay Area, I've moved to an area with much higher maximum tax rates than my former home of Missouri. Yet the Bay Area is a major center of commerce for our country and the source of much of its innovation. Now I could dismiss this as a result of the nice scenery and mild weather. But look at the country as a whole. Some states have no income tax at all: South Dakota, Nevada, Alaska, Wyoming... The only no-income-tax state that's a major center of industry is Texas, and that's easily explained by oil money and an abundance of refineries. On the other hand, New York and California are probably the two most important states for business and they also have among the highest tax burdens. If taxes made such a huge difference on business activity, should there be at least SOME correlation between state tax rates and the amount of business activity??

Letter to NPR's Marketplace

I was recently contacted by NPR's Marketplace regarding a letter I'd submitted. I was responding to a commentary from a guy about my age saying he was willing to sacrifice the luxury of retirement if it meant digging out of the massive debt we've been saddled with and providing a decent health care system. I absolutely agreed and sent the following letter in response:

***I just listened to the commentary by Tim Evanson and I must say he
nailed it for my generation. It should be required listening for every
politician. I, too, am fine with the concept Social Security probably
won't be there for me. It's there for my parents who will soon start collecting
it, and that's good enough. I'm far more concerned with access
to health care and, of course, keeping the dollar and our overall
economy solvent for my grandkids.

I don't think people in the 30 and under crowd have quite the
entitlement mentality that our parents had. The Boomers inherited the
greatest middle-class standard of living the world has ever seen as a
result of massive government investment by their parents in things
like the GI Bill and Interstate Highway System. They turned around and
demanded tax cuts and an end to that public investment. But that's OK.
They gave us the Civil Rights Act and broadened the idea of what the
phrase "liberty and justice for all" should truly mean. But they've
left the responsibility of rebuilding our nation's infrastructure and
salvaging the economy to their descendants. Each generation has their
responsibilities to bear. I think many people in my generation
understand ours.***

It was a quick rough-draft, and I want to add some additional explanation.

The line about "entitlement mentality" might bother some Boomers, but here's what I meant by it. I've been thinking lately how the Boomers were born into a world that was
all about them. After WWII, all the attention of the nation was turned
to the post-war children. Initially, that was a really good thing as
Boomers had the courage to defy the status quo with regards to gender
and racial equality. But it seems like after the "hippie euphoria"
wore off, the next big movement of the Boomers was the Reagan
Revolution and the corresponding abandonment of all sense of financial
responsibility (on a national level, of course...obviously on a
personal level many boomers have been very responsible). The
last three decades have seen taxes slashed, along with investment in
education (hence skyrocketing college costs) and infrastructure (hence
collapsing bridges). And of course, that tax money that was no longer
being collected continued to be spent...on the military. So the
deficits have piled up. And now that the Boomers are starting to
retire, the bill for all this will fall on future generations. It's
amazing the WWII generation managed to fund the New Deal and the
largest war effort in history, and then paid almost all of it back
within a decade or two. The deficit spending of Reagan still hasn't
been paid back--it's been added to--and what do we have to show for
it? The economic policies of the last 3 decades didn't "create"
economic growth as much as they "borrowed" growth from future
generations. The scary part is the major innovations of the last few
decades (the internet, microchips and PCs, satellite technology,
wireless communication, etc.) were pretty much all developed in their
early stages by government spending in the 50s through 70s. Since
government hasn't been doing that kind of R&D for the last few
decades, where will the innovations of the next few decades come from?