Thursday, February 26, 2009

Welfare for the rich

As a tax preparer, I sometimes find myself thinking about estate tax issues. Now the estate tax is the official name for the nasty "death tax." You know, it's bad enough the government takes from you when you're alive, but then they even take your money from you when die. Oh, the humanity. I mean, how will anybody get into Heaven when the IRS is taking all their money so they can't pay the entry fee?

OK, so estates are all about leaving something to your heirs and the outrage is really about why shouldn't the heirs be able to keep everything that's left to them? Usually the debate is framed along whether it's fair to the recipient that they may have to lose land or a business or some other piece of the property that's been in the family for generations. I think it's time to reframe the debate.

One of the biggest criticisms of welfare to poor people is the notion this creates a culture of dependency. And certainly there is much validity to this criticism. One of the reasons getting welfare right is so difficult is precisely because even welfare's biggest advocates want programs for the poor to be a bridge to a better life or a safety net when people catch a bad break. I don't know of anybody who wants to create an entire culture of people who generation after generation do not know how to earn a living. Not only is this outcome bad for the nation that has to support the free-loaders, but it's bad for the dependent class themselves who never get the pride of achievement or the simple satisfaction of earning one's own way in life. Most people rightly condemn social programs that function to create a culture of dependency.

But why is that we are so concerned about a culture of dependency on the state, but I have never heard anybody express concern about the culture of dependency on the ESTATE?

I spent years living in mountain towns near ski resorts. In these areas was a high concentration of what were known as trustafarians. These were the beneficiaries of trust funds who would never have to work a day in their lives. Go hang out in any highly desirable vacation destination and you're bound to run across some trustafarians. (I'd recommend starting your search at a trendy bar or nightclub.) These people are typically quite smart, as their parents generally were talented and successful people. Yet despite whatever talents they may have, they contribute nothing to society except whatever unearned cash they toss around. Though they live lives most people would consider pure bliss, they often are rather unhappy people, hence high rates of drug abuse. Yet nobody seems much concerned and there is a highly vocal group of people who defend the institution that leads to their dependency.

It's time we look at inheritances for what they are: welfare. Abolishing estate taxes, or making them only applicable at absurdly high levels as we do now, only serves the idea that if people are given a bunch of money they didn't earn, they'll be happy. Handouts for the rich are just as destructive as handouts for the poor.

Of course, one of the main reasons people work hard to achieve is so they can give their children a high quality of life. There's nothing wrong with that. But let's consider what composes a high quality of life. A good education tends to correlate with a high quality of life, and wealthy people are certainly able to provide that for their children. Professional achievement and success are big contributors to a high quality of life, and wealthy parents can give their children tremendous advantages (besides education of course) in this area with insider knowledge and excellent connections. And then there's the more intangible (and important) things like quality relationships with friends and family. It's hard to see how inheriting mountains of money will help with this either; in fact, this may also be complicated by a massive inheritance as it can lead a person to question whether they are really liked for who they are or just what they have.

Something must be done with the assets of the deceased, and clearly letting enormous assets simply pass to heirs is bad from a public policy perspective and bad for the heirs.

Here's what I propose: Limit the amount of cash and highly liquid assets (stocks, mutual funds, etc.) that can be inherited tax-free to the equivalent of roughly one year's average salary. If an heir wants to take a year off to mourn the loss of their loved one, now they have the funds to do so. Beyond that amount, however, tax the hell out of it. Maybe implement a 100% tax at some point. Then there's the sentimental things. Valuable items that may have sentimental value should be allowed to be passed on, as long as they're not income-producing, and with one catch. The recipient gets no basis in the property. You can inherit the 1000-acre ranch that's been in your family forever and not pay any tax on it. But if you sell it, you're paying tax on the whole amount...and at ordinary tax rates, not long-term capital gain rates.

Finally, there's the issue of income producing property. Treat it like liquid assets. Allow a small allowance, and beyond that it gets taxed. Since it's producing income, heir can be given the option to pay the tax in installments which will be paid by the income-producing property. This won't work in every situation. But again, back to the point about earning one's own way. For the heir who just inherits a successful business, where's the sense of accomplishment? Shouldn't the heir have the opportunity to build their own business? For family businesses, it will be easy enough for the heir to simply establish their own business and rapidly build it with the clients of the decedent. For large businesses, it can be incorporated and the heir will have a chance to earn their way to the top (with a tremendous advantage of course).

It's time we stop the madness of encouraging a culture of dependency among those born into wealth. Both dependency on the state and dependency on the estate serve to rob society of human resources and individuals of dignity.

Sunday, February 22, 2009

Reaping dividends from our military investment

Over the last eight years, it's clear the one area of government that has seen significant spending increases has been the military. Official military spending in the budget stands at around $500 Billion. "Emergency" spending for the operations in Iraq and Afghanistan tends to consume another $200 Billion or so each year. This represents the most significant single investment the government makes each year. So the question is how do we use dividends from this investment to help us out in our current recession?

Obviously, the biggest dividend that military spending pays is providing a secure environment back home for economic activity to take place. But given the massive size of what we've spent in the last eight years, maybe we need to start getting a little more creative in how we collect dividends from this investment.

The most obvious way would be to simply start cutting back on this spending. We spend as much on the military as the rest of the countries of the world COMBINED. Clearly, we can afford to cut back significantly and still have by far the most powerful military on earth. While it's true we have operations in Iraq and Afghanistan that can't simply be stopped overnight without dire consequences, we have countless operations throughout the world that aren't nearly so necessary. Are we concerned that Germany is about to embark on another conquest to take over the world? Or Japan? What about the dozens of other countries where we maintain bases? If we pull out of Poland, for example, are there really going to be dire consequences for us, the world, or even Poland? How much could we save, and divert to more productive ends, if we shut down overseas bases that aren't absolutely vital to active military operations?

I don't know the answer to how much we could save, but I have an idea for how to get an estimate. The Department of Homeland Security operates on a budget of about $40 Billion. Now think for a second about what the DHS actually does. The DHS essentially performs the only function outlined for the military in the Constitution: defending the nation and its borders. The traditional branches of the military have strayed so far from the Constitutionally defined mission of national defense that we've been forced to create an entirely new government department to do the job. It seems by focusing military resources on defending the homeland rather than building a global American empire, we could cut hundreds of billions out of the federal budget. If we simply redeployed troops to either active war zones or within US territory, we would have a surplus of soldier and could stop recruiting for years. By redeploying our equipment in the same way, we could stop procuring additional equipment for several years.

The true cynic in me wonders if there's the potential to go even further. We've spent trillions on weapons that, in many cases, have no application in our current military operations. Could we make an effort to identify potential markets for these weapons? I'm thinking nations with large, belligerent neighbors that threaten their security. The world seems to have no shortage of such situations. How much could we make by arming weaker neighbors? If done strategically, it seems like such an approach could paradoxically lead to greater peace by making it less appealing for powerful nations to pick on their weak neighbors. Of course, the easiest, but least likely, example would be Palestine. While Palestine is guilty of killing 3-4 Israelis a year with its hostile actions (source: The Economist), Palestine suffers hundreds, if not thousands, of casualties from its more powerful neighbor. A well-armed Palestine would be better able to deter massive invasions by Israel like the one they just experienced. And if Palestine didn't feel so utterly impotent, they might even stop the guerrilla rocket attacks that are currently the only outlet to vent frustrations. Maybe some of Palestine's oil-rich allies would be willing to loan them the cash? Alright, my utterly cynical side is done.

The point is if we're ever going to restore fiscal sanity to our national government, the most obvious place to start is reigning in military spending. We spend twice as much as a percentage of our GDP than just about any other developed nation. And if there's ever been a program that defines the notion of a wasteful black hole in the budget, the military has to be it. Clearly, the more we spend on developing and maintaining a military presence around the world, the more we need to spend in subsequent years. This is because our very presence around the globe provokes resentment and hostility from people who don't like the presence of foreign powers in their nation. (Really, why should this be questioned? Would Americans tolerate the presence of French bases within our borders? And the French aren't all that different from us or hostile to our interests. How would we react to a Cuban base on our land?) This resentment and hostility eventually leads to action against our military (or at least the presence of our military) and this requires us to devote additional resources to battling back.

At least when we spend on things like NASA or National Parks or Medicaid, we don't create such non-negotiable requirements for additional spending. People may decide they like those programs and want more spent on them, but people do not attack their presence in a way that necessitates exponentially increasing spending just to maintain status quo. But this is what we face when attempting to maintain a global military presence. It's time to end this game of diminishing returns. Let's take our existing investment and redeploy as much of it as possible to supporting the core mission of the military. This reallocation should allow us to drastically cut spending for several years while the existing extraneous assets are reallocated to more vital roles. The spending that is saved can be used to spur economic development, creating future wealth that can be tapped to increase military spending when the need later arises.

Friday, February 20, 2009

Why are we repeating an obvious mistake?

The best judge of how best to spend a person's money is that person himself, not the government.

Such an obvious truism. My inner libertarian instinctively nods in agreement. But many obvious statements prove to be not quite so true when closely examined. If there's ever been a clearer demonstration of the falsity of this statement than the last five years, I can't imagine what it would be.

Every economy is a mix of public and private goods. Even the most ardent communist economies have had some level of private markets at work, even if they were underground. And every government exists to provide some sort of common good for its citizens, even if it's only something as basic as national defense. The key to a prosperous economy is a matter of finding the right mix.

In recent years, the US has been governed with the philosophy that we need to move more goods into private hands. This philosophy saw its fullest expression in the latest round of tax cuts in 2003. Since 2003, the US has had its lowest levels of taxation since the beginning of the Great Depression. If the idea that the economy will always do best by moving more money under private control to spend as they see fit has merit, then we should be enjoying incredible prosperity at this point. And while we did experience a brief period of economic growth, it's clear this growth was experienced purely as a result of easy credit and people living beyond their means. The excess money released into the economy was used by investors to pour into financial derivatives that have mostly gone up in smoke. It was used by consumers to buy horribly overpriced assets that have now returned to more reasonable prices and erased that extra money from the economy.

By moving too many goods and too many choices about the production of goods into private hands, we have wound up with a terribly dysfunctional economy that is in worse shape than any American economy in decades by pretty much any measure. Yet, in attempting to fix the economy we're going to devote almost half the money in the stimulus package to MORE TAX CUTS! What are we thinking?! Did we not learn from anything from the last time around? It was only six years ago!

We need intelligent spending to fix the economy. More big-screen TVs, gas-guzzling SUVs, and over-priced homes are not going to fix the economy. Productive assets are what is needed. And over the last decade, private investors have proven just how irrational they can be in identifying productive assets. For the economy to recover, we need to invest in transportation, communication, and energy infrastructure. We need to invest in education to make workers more productive and innovative. We need to invest in a regulatory environment that rewards real increases in productivity, not simply inventive ways to cut corners and not get caught. Unfortunately, these types of things have gone underfunded for decade because they don't mesh well with private investment. The major innovations of recent decades...Internet, satellite technology, microchip technology...were the result of massive government investment in the early stages of development until these products reached commercial viability. But at this point there's not much in the pipe for the next round of real economic expansion. It could have been renewable energy, but funding for that was nearly eliminated for a couple of decades and so we remain years away from those technologies being marketable and "ready for prime time."

By devoting so much money to tax cuts instead of productive spending, we're simply repeating the same mistakes that got us to this position in the first place. I'm all for reaching across partisan lines, working together, and compromise, but there do come times when truly great leaders must recognize the sensible course of action and pursue it despite objections. I hope President Obama has not compromised too much when a resolute commitment to doing the right thing is what is really needed.

Thursday, February 12, 2009

Health Care

For all the talk about the health care reform and the dangers of "socialized" medicine, I wonder why I haven't heard this simple question: Why is it when we dial 911 for emergency services, the fire department comes for free, the police department comes for free, but an ambulance results in a bill?

Of course, nothing is really free. Fire and police services are paid for by our tax dollars. But, really, would we want that any other way? Can we imagine a system where the fire department shows up and demands a credit card before starting to put out the fire? Our how about a police department that can't address an armed robbery in progress because they're responding to a petty vandalism call from somebody with better "police insurance?" Yet we accept as normal the idea that medical treatment, even in emergency rooms, is typically not delivered until billing information is collected. Why do we not hear more outrage at how absurd this is?

How do free market ideologues justify the notion that people suffering a medical emergency will behave as the economic rational actors required for free market principles do be effective? We recognized as a society long ago that emergency situations can not be handled by market principles. Yet for some odd reason we've "socialized" police departments and fire departments, and we've had a "socialized" military since the founding of our country, but there remains a disconnect when it comes to health care.

Here's a further absurdity. We already have universal health care...but only for people over age 65. (Is it just coincidence that seniors also make up the most reliable voting bloc?) If government-provided universal health care is so bad, why do we give it to all of the seniors in society? What makes this arrangement mind-bogglingly nutty is the effect this has on who gets care. Much is often made of how a socialized system requires the government to make choices regarding who gets rare instances involving older people not getting care in favor of a younger person. While this situation is unfortunate, why is it better to subsidize care for a person beyond working age at the expense of not allowing a working age person to receive care? Currently, young working people in America are frequently uninsured. So somebody just starting out in the work-force, possibly starting a family, might not be able to get access to necessary health care. Yet we're willing as a society to make sure this person's grandparents receive health care? This makes no sense. If we can afford health care for those who need it most and are least able to afford it, why can't we, as a society, afford to provide health care for those who are least likely to need it and most likely to repay the costs in their working life?


Paying for the stimulus (and fixing SS, too)

There's a very simple way to pay for the enormous stimulus bill. It starts with the realization that people are living longer, healthier lives than they were decades ago when Social Security was established. Yet even though most people are staying healthy well into their 70's, SS retirement age hasn't budged in nearly three decades. We just had a man in his 70's, a man who'd endured years as a POW no less, run for President. Congress is full of people in their 70's and beyond. The notion of a "full retirement" age of 66 seems absurd.

SS outlays account for roughly $500 Billion. Raising the retirement age by 3 months, would cut the number of people receiving SS by about 1%, saving roughly $5 Billion. Do this every year for 32 years, and the result would a savings of over $3 Trillion. That could pay off the stimulus bill, plus interest, and still have money left over to address any fears people have about the insolvency of the system. At the end of the transition, people would be eligible for benefits at 70 instead of 62, and full retirement age would be 74 instead of 66. By that point, average life expentancy will likely be well over 80 (unless our health care system continues to deteriorate), leaving seniors with nearly an entire decade on average to enjoy full retirement benefits.

While many will whine about the unfairness of this, let's consider why we have such an enormous deficit in the first place. Fiscal responsibility has been rampant since 1980. Everybody who will be affected during the phase-in period of this change has been a voter since before that point. Collectively, there's a responsibility there and this is one of the most reasonable ways to address it. Unfortunately, the younger generation bearing the full impact of this change had nothing to do with the massive fiscal irresponsibility that got us here. But at the same time, we have enjoyed a tremendously high standard of living our whole lives and will probably hit 70 in better health than just about any generation in the history of the world. Plus we'll have had decades to prepare ourselves for this reality and get used to it. We'll get by.

Sunday, February 08, 2009

A simple way for government to help the middle-class

If your employer offers a 401k, chances are you've been encouraged to join it. You've quite possibly been auto-enrolled in the 401k so you wind up contributing to it without having to do a thing. So are employers working so hard to get employees to contribute to 401k's because of a strong sense of concern for the welfare of their employees when they enter retirement? Of course not. Employers are working really hard to encourage employees to participate in 401k's because the Highly Compensated Employees (HCEs) are limited in how much they can contribute to retirement plans by the amount that average employees contribute to the plan. Since the HCEs usually are involved in decisions about how to promote 401k participation, it's in their own best interest to do as much as possible to get employees to contribute as much as possible. This relatively simple rule that ties executive perks to the perks available to common employees undoubtedly makes a huge difference in the level of participation in retirement plans by countless rank and file employees.

Well why not use similar incentives in the income tax code. Rather than set the tax brackets at arbitrary levels, why not tie the top brackets to the median income of the nation? I'm sure by the end of a calendar year, it would be possible to determine an official number for the mid-point of that year. So on December 1, for example, the government could announce what the median annualized income was midway through the year and what the corresponding top tax brackets will be. Done right, this could give tremendous incentive for very high wage earners, who frequently make decisions affecting the wages of very large numbers of people, to take significant steps toward improving the wages of middle-income workers.

Here's an example: Currently the highest tax bracket starts at a little under $400,000. Why not replace that arbitrary number with a value equal to 10 times the median income? Currently, that would come out about the same. As median wages rise, the amount of income not subject to the maximum tax rate for higher earners would also rise. But to make this plan truly effective, an additional tax bracket (or two) would need to be added. Suppose we made a tax bracket set to 100 times the median wage. For the plan to work, taxes above this level would have to be significant, say 60% or so. This sets up significant incentives for senior executives making multi-million dollar incomes to work to create not just McJobs, but Good Jobs, and to pay mid-level workers more generously. When senior executives know that giving raises to rank-and-file workers ultimately means a raise for themselves in terms of reduced taxes, I think most executives will suddenly find ways to wring a little more out of the budget to go towards salaries.

Thursday, February 05, 2009

The Era of Big Government must return

Almost thirty years ago, Reagan announced the government is not the solution to our problems, it is the problem. (Although to be fair to Reagan, it should be noted he began the statement with "In this situation", something modern-day Reagan-worshippers seem to have forgotten in their zeal to apply the eliminate government solution to every problem.) Over a decade later, Clinton announced "the era of big government is over." But now in response to the most far-reaching economic crisis since WWII, government leaders are frantically trying to expand government to address the problem while many in the public are wondering if government is capable of positive intervention in the economy...or asserting quite simply that it isn't.

This belief that government can not help doesn't square with history as I understand it. We Americans like to believe that we are as affluent as we are because we are hard-working, industrious, intelligent, virtuous, and generally deserving of our prosperity. But do we really think we are the first nation of good, hard-working, smart people? By necessity, most humans throughout history have been smart and hard-working...and very poor. Only in the last few hundred years has work been rewarded with prosperity and abundance, and only in a few nations. While these nations have been lucky to have significant natural resources in addition to smart, hard-working people, again they hardly seem alone in these respects. Countless nations in recent times have squandered significant natural resources.

The difference, in my opinion, seems to be democracy. Before the spread of democracy, monarchy was the rule. Government was very protecting the interests of the small group of people who had a voice in the government. Democracy changed that. In a democracy, government can not be small and efficient. It's inherent in the nature of democracy. Because in a democracy, the government's job is not to protect the narrow interests of a small group of people. The job of a democratic government is to protect the interests of ALL people. And as a result, democratic governments would seem inclined to grow rapidly.

In fact, in US history, as well as the history of most western nations, the democratically elected government has steadily expanded since the beginning of our nation and its democratic government. A small-government ideologue would be inclined to condemn democracy at this point. But consider what has come with the expansion of government. The history of the US has seen the creation of a large and affluent middle-class unlike anything ever seen in the history of the world. The expansion of government and the rise of the middle-class have gone hand-in-hand throughout the history of this country. It takes a big government to defend the interests of a large and affluent population. I am aware of no nation anywhere on earth in all of its history that has had a sizable and affluent middle-class without a government composing a significant portion of the economy. A survey of sizable nations with prosperous middle-classes would reveal the ideal government size is between 1/5 and 1/2 of the total economy. The US, of course, falls at the very low end of this scale. And our middle-class is currently the weakest it has been in many decades, and ranks near the bottom of industrialized nations in things like health, education, etc. I think this is more than mere coincidence. While it is certainly possible for a government to grow too large to be effective, and history gives no shortage of examples, it is clear from the data that an overly large government is not a danger to us right now. Our problems seem to arise from demanding government be too small to do its job of defending ALL the people effectively.

We need leaders brave enough to say, "At this moment, small government is not the solution to our problems, small government is the problem."

Sunday, February 01, 2009

Jobs = Market Inefficiencies & Government Waste

As I listen to the stimulus bill being debated, I can't help but feel the free-market side of my brain being twisted in pretzels trying to follow the logic of commentators. Time and time again, I hear proposals to do things a particular way because it creates more jobs than the alternative way to achieve the same end. For example (and I'm a huge advocate of sustainable energy, BTW), I've heard and read numerous comments that wind energy, for instance, should be pursued because it creates more jobs than something like simply retro-fitting coal-plants to be more efficient and less polluting. This strikes me as insane. I believe we should move toward wind and solar and other sustainable sources of energy, but not because they "create more jobs." Move to those sources because they don't pollute, they don't emit CO2, they don't require sticky geo-political negotiations that may later require massive military spending to maintain...but don't argue for renewable energy because it creates more jobs!!

What are we saying when something creates more jobs? We're saying it's less efficient. We're saying the alternative can be done with less effort and expenditure. If we want to have full employment, the solution is simple: simply mandate that various activities be done in a highly inefficient way. If we require all clothing to be produced in America with no mechanical means used at any point in the process of the fibers, we would immediately have jobs for all Americans. But such an approach is absurd. What's the point of labor-saving technology if our goal is to put as many people to work as possible for as many hours as possible?

And this gets to the fundamental paradox we're entering into economically. At the beginning of the Industrial Age, I understand there was some concern about what would people do for work not that machines could replace them. Of course, it turned out that at the beginning of the Industrial Age, the rampant desire for consumption had only begun to be tapped in the western world, and people found numerous other occupations to fill their time productively. Though the refrain has been repeated many times since then (I can remember it as recently as the '80's in relation to robots replacing auto workers and other manufacturing jobs), these concerns have so far always proved to be unfounded. But perhaps this is no longer the case.

Most proposals for creating new jobs right now come from government funded public-works projects. Private sector employers are laying people off left and right. But nearly every government proposal has been criticized by some on the grounds it is wasteful. But maybe that's the point. Maybe some in government realize that the only way to keep people employed is to create inefficiencies. As a tax preparer, I often wonder if part of the reason for the absurd complexity of the tax code is to keep people like me employed. If we had a straight-forward tax code that allowed nearly everybody to prepare their own return in under an hour, millions of people would be out of work.

Psychologists studying happiness generally conclude that once an individual reaches a certain level of wealth--roughly equivalent to what most American achieved not long after WWII--there is almost no further increase in happiness from increasing wealth. It would seem the last few decades have produced economic growth for no other reason than we've simply been conditioned to believe that more is always better. Suppose as a result of this financial crisis, most Americans finally realize that they no longer need to keep increasing their consumption in order to achieve greater happiness, and as a result the economy stagnates. (Of course, the economy seems to be stagnating regardless of what Americans have realized about happiness.) If levels of consumption (and by extension, production) remain pretty much stable, what will ultimately happen to employment as innovation makes workers more efficient? Obviously, the same level of production will be possible with fewer and fewer workers. Over time, the laid off workers will decrease consumption enough that more workers can be laid off. And the cycle will continue. Maybe that's what is already happening.

It seems to me there's a very important discussion we should be having right now as a nation. If we're producing everything we want, but we don't need everybody's labor to do it, where do we go from there? Do those who are the least talented get a free pass because we can produce everything they need without their labor? Or do we let the least talented starve and reduce the overall demand, leading to a new round of least talented being removed from the labor force? And what is the point of all this labor-saving technology if everybody is still expected to work all the time? Is it possible to create a system in which everybody does less work in order to allow everybody to work and still meet consumer demand?

It seems like we're putting forth a lot of effort and spending to make sure everybody works full-time for no particular reason. If we can meet all of our reasonable desires with everybody working only part-time, is it possible to set up a system in which that is what actually happens?