December 31, 2010

Government taxicab regulation contributes to drunk driving

Government regulation of taxicabs reduces the available supply of cabs, and raises the prices of those cabs that are available.  The increased price discourages the use of a taxi throughout the year.  On heavy usage "party" nights (such as New Year's Eve), it results in an outright Soviet style shortage where landing a taxi at any price becomes a game of chance.

On New Year's Eve, there usually are programs for free taxi rides such as Baltimore's "Tipsy Taxi" or DC's "Sober Ride."  Both programs are funded primarily by the government and by big alcohol companies.  But user experience indicates the program is more of a PR stunt than any substantive method of transporting drunk drivers.  

Complaints about the free program from several commenters on the Baltimore Sun blog:  

• This service does not exist. Every time I've attempted to use tipsy taxi, the number rings busy and cuts off. Tipsy taxi is nothing but a big fat joke.
• I've tried it several times, on NYE, July 4th, Halloween, etc., and it's a FRAUD
• This is a total scam orchestrated by someone well above my pay-grade.

But the shortage isn’t just for the PR stunt program; there's a shortage for regular service as well. The problem is that you can’t expect a business to operate profitably all year long while maintaining enough capacity to handle the huge spikes in traffic that come on these holidays. The natural solution to this would be to allow individuals to freely enter and exit the taxicab business. The government-imposed regulations impose inflexibility to what must be a flexible market if it is to function properly. Every time there is a severe shortage of holiday taxicabs, you are witnessing a government-created market failure. It is an example of regulatory capture that practices monopoly economics to transfer wealth from society as a whole, into the hands of taxicab companies. Montgomery County, for example, limits the total number of licenses issued and even resorts to a lottery method for allotting them. The state of Maryland requires an FBI background check and a personal, one-on-one interview with a government employee. Ironically, information about traffic violations is not required on the criminal disclosure section.

The solution is a licensing holiday. Exempt licensing requirements on the heavy load holidays: New Year’s Eve, Saint Patrick’s Day, Halloween, 4^th of July. On these days anyone with a valid driver’s license, a legally registered vehicle, and the willingness to work should be able to hold himself out as a driver-for-hire.  At a time with seemingly permanent 10% unemployment, the government should not be maintaining laws that prohibit honest work, especially when a spillover effect of that honest work would be to reduce drunk driving.

If the government truly were serious about reducing drunk driving, the government would ditch the futile PR stunts and would allow those who need money to provide a service to those who need the service.

To put it another way, increased drunk driving is a negative externality of government regulation of the taxicab industry.

-- Also at my Seeking Alpha blog --

December 9, 2010

Bush tax cut deal bullish for gold

The everything-and-the-kitchen-sink deal reached on the full extension of the Bush tax cuts marks the end of even pretending to be serious about deficit reduction, or even deficit control at this point. With every dollar of deficit above our historical average already being monetized, and with this deal widening the 2011 deficit by an estimated $450 to $600 billion, it only means one thing: More quantitative easing, more fiat currency, and higher gold prices. Our newly divided government has shown that compromise will mean the Republicans getting lower taxes, and the Democrats getting more spending. The two can only coexist with the help of the digital printing presses, especially given waning interest in real lenders loaning the US real money as evidenced in the recent Treasury sell-off.

Mounting evidence shows that deficit-widening stimulus programs initially sold as temporary are becoming permanent. The Bush tax cuts for one, but we also have the extension of unemployment benefits, and the extension of the Obama tax cuts which were initially set to expire after one year. Expect to see the aid to states continued when the prospect of it running out becomes dire. There is simply no political will to take anything off the table once it is on. And while divided governments of the past have been marked by gridlock and effectively stepping on the brake pedal, this one seems primed to stomp on the gas pedal with both feet while aiming the wheel straight for the insolvency cliff.

Americans are hypocritical, and it is that deep-seated hypocrisy that our elected representatives are representing. This past month, CNN polled registered voters on a series of alternatives indicating the priorities of deficit reduction when paired against a specific program. The results show that voters are a long way off from getting serious about the deficit, and politicians' opinions are always a lagging indicator. While 85% are worried about the deficit hurting their kids, and while 56% even believe it is likely to cause economic crisis, there is seemingly zero support to actually make any sacrifices to reduce it.

Programs Americans prioritize over deficit reduction and the percent who favor it:

• Social Security 74%
• Medicare 79%
• Medicaid 69%
• Defense spending 49%
• Unemployment benefits 61%

With interest on the debt, that’s 66% of total spending that is off limits. This latest tax cut extension “compromise” is simply an acute example that reflects that the vast majority of voters and politicians are more than happy to take something, as long as they don’t think they have to pay for it. We are witnessing the tragedy of public choice theory. Economic theory alone isn’t strong enough to explain how this zeitgeist will translate into a weaker fiat money and stronger precious metals. This is more of a Newtonian physics level of clarity and certainty.

The math is as simple as it is compelling:
Continued low taxes + continued big spending = continued big deficits.
From 2010 until as far as it is prudent to predict, big deficits = quantitative easing. That is good for gold. Finally, never trust a man who claims to be 100% confident about predicting the effects of anything as complex and uncertain as unprecedented monetary policy.

-- Also at Seeking Alpha --

December 6, 2010

Bush tax cut logical fallacies

Several smoke and mirrors tricks are buried within the arguments for the complete extension of the Bush tax cuts (the contested portion over 250k).  These are  (1) the consumption fallacy, (2) the tax-cuts-on-someone-else fallacy, and (3) the fallacy of the complete misunderstanding of how taxable income is figured.  The first two fallacies must be understood because they are repeatedly used by both the left and the right to justify intellectually bankrupt arguments and ideas -- such as the idea that paying someone not to work creates wealth or that some rich guy who feeds his five dogs expensive steak is somehow good for me. They are also part of my 10 Principles of Economics from September 14.

(1) The consumption fallacy: 
As opposed to the fallacy, the reality is that your contribution to society is what you produce, not what you consume.  Multiple arguments in favor of extending the contentious part of the Bush tax cuts go something along the lines of “but the rich people are responsible for most of the consumption that drives the economy."  Tea Party darling Marco Rubio said that the top 2% of the US accounts for 30% of the consumption. This argument is utter nonsense.  It reminds me of Peter Schiff’s story where some Asians and an American crash on a desert island and the American is assigned the job of eating while the Asians are assigned tasks essential to survival. Schiff says a modern day economist would say the American is the key to the entire island’s economy. Milton Friedman said repeatedly that one’s contribution to the economy is what he produces, not what he consumes. Those on the right should realize that this is the exact argument used by those on the left to justify extending unemployment benefits (the apparent horse to be traded in this deal).

(2) The cuts-on-someone-else fallacy:
As opposed to the fallacy, a tax cut on another man helps you when compared to no tax cuts for anyone; however, when compared to a tax cut for yourself, the choice is clear which is better for you. If you and I are on Peter Schiff’s desert island, and someone drops $100 on me, it clearly helps you. (Let’s pretend we can buy stuff from the outside world with the $100 even though we can’t leave the island.) But were that $100 to fall on you instead, it would help you more. If there’s room in the budget to cut taxes for those making over 250k, there’s room in the budget to cut taxes for those making under 250k, and there are convincing arguments to go that route. For starters, someone making $67,000/year already pays a higher total federal tax rate than someone making $380,000/year. This is possible because the Social Security tax is so highly regressive. [See footnote.] Furthermore, the sub-250k sector of our economy includes the portion that is actually hurting. Contrary to laughable claims saying otherwise, those making over 250k/year simply are not feeling the pain felt by so much of the rest of the country. Adam Smith supported a progressive income tax: "It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion." Smith justified this position with his statement on what the purpose of government is: "Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all."

(3) How taxable income is figured:
Let's look at the Subchapter S argument that so much of the 250k+ income is from small business owners. What is taxable income? It is net income. Net income=gross revenue-expenses. Expenses=employee salaries, rent, inventory, advertising, and equipment. Net income (after taxes)=the owner’s 3^rd car, 2^nd home, or trip to the islands in the winter. The easiest way for a business owner to reduce his tax liability is to reinvest what is leftover in growing his business, rather than growing his lifestyle. There is, of course, the excess burden of taxation that needs to be compensated for. The best way to compensate for this would be to cut the payroll tax by an amount equal to the increased revenue from the top marginal adjustment. This would lower the cost of employing an additional worker, shifting the point where marginal cost equals marginal benefit outward, thereby increasing employment.

Finally, to clarify: The problem that the US faces is too much spending. Shortage of taxes is not the problem. Research repeatedly has pointed to an ideal level of total government spending somewhere near 10% of GDP. Milton Friedman advocated this level for years. I share this view as well and therefore don’t think taxes should be raised on anyone. My main point, however, is that given the reality of budgetary and political constraints, if there’s $70 billion dollars/year of room for tax cuts, they should not be directed solely at the top 2% of the population. With unemployment hovering at 10% with no end in sight, better tax cuts would be tax cuts that reduce the cost of labor.

Footnote:
This includes total federal income tax and total payroll tax to include the employer contributed portion.  An average worker with $380,000 of taxable income would pay 23.27% federal income tax, 2.9% Medicare tax, and 3.4% Social Security tax for a total federal tax rate of 29.57%,  An average worker with $67,000 of taxable income would pay 15.68% federal income tax, 2.9% Medicare tax, and 12.4% Social Security tax for a total federal tax rate of 30.98%.

-- Also at my Seeking Alpha blog --