February 24, 2011

Maryland gas tax hits the poor 5 times harder than the rich

Maryland’s proposed gas tax of an additional 10 cents per gallon would hit families at the poverty level 5 times harder than the average family within the top 25% of tax payers. This is the epitome of regressive taxation.

For a family with income of $162,279/year (the average income of the top 25%), the tax would equal a miniscule 0.08% of their income based on typical fuel consumption of 1,309 gallons per year. A family at the poverty level ($14,710-$18,530 depending on household size of 2 or 3), would pay .38% of their income based on typical fuel consumption of 632 gallons per year; that’s 4.75 times more than the wealthy household.

Anyone who dismisses the significance of raising taxes almost half a percent on the poor, while not even raising them a tenth of a percent on the rich, has probably never lived like a poor person. If you haven’t run out of gas because you’ve run out of money, haven't gotten home with the change you scrounged from under your floor mats to ask for “$1.75 on pump #2 please” paid for with a fistful of dirty pennies and nickels, or haven't suffered the embarrassment of going through the grocery store checkout line with nothing but ramen noodles because you needed to budget for gas, then you probably can’t comprehend the significance of taking another half a percent of a poor person’s wages, or recognize the flagrant injustice of doing so at the same time you are taking less than a tenth of a percent of a rich person’s wages.

There is little else that would rival the draconian regressiveness of Maryland’s proposed gas tax. Perhaps Maryland could choose to tax groceries or heating bills. Perhaps a new tax that only applies to the first $8,500 of income -- whoops, they already did that.

I propose 2 much better alternatives:

1. Cut spending. Yes, the bulk of MD’s budget goes to education, health, and public safety; however, consider the following:
   1. Half of those employed in education are not teachers.  They are "other."  We can cut money from the $13 billion MD spends on K-12 education without cutting teachers or teachers' pay.
   2. MD spends almost $2 billion a year on public safety (to include police and prisons); perhaps tight times are the time to re-evaluate the war on drugs, given that about 50% of all police and prison spending is devoted to it.
   3. MD spends another $2.4 billion per year on higher education. Stop subsidizing frat parties, and focus the subsidies on online learning.
   4. Do away with mandatory art class past elementary school. By 6^th or 7^th grade, everyone knows who has artistic talent, and who’s simply burning through art supplies. Keep it as an elective and spend a more focused, smaller amount of resources on the kids who have talent.
   5. End public pensions. Only 20% of the private sector gets pensions. Why does 80% of the public sector get pensions?
   6. Stop overpaying contractors who do state construction projects. Their concentrated benefits are the diffuse costs borne by tax payers, and in the instance of the gas tax, born by the poor.

2. Have a progressive property tax, and/or a progressive vehicle registration fee, and/or progressive vehicle sales tax. Such a system is straight from the Wealth of Nations so much so that you could call it the “Adam Smith Tax.”

Regardless of your ideological preference on the spectrum of tax increases versus spending cuts, we should all agree that taxes that hit the poor 5 times harder than the rich are simply wrong. It is pure cowardice to go after this group that is least able to defend itself. To anyone in the Maryland General Assembly who is considering this: Grow a pair and either sock it to the rich, or take on the well organized special interest groups who would howl at the spending cuts.

Sources:

• US Energy Information Agency, gas consumption by income:
  www.eia.doe.gov/emeu/rtecs/nhts_survey/2001/tablefiles/table-a10.pdf
• IRS 2008 tax returns crunched by The Tax Foundation:
  www.taxfoundation.org/news/show/250.html
• Urban Institute, more gas consumption by income plus commuting habits:
  www.urban.org/UploadedPDF/411760_rising_gas_prices.pdf

-- Also at my Seeking Alpha blog --

February 23, 2011

Unions have no business in the public sector

There is a huge distinction between private-sector unions and public-sector unions.  Adam Smith might support private-sector unions. However, he would unquestionably oppose public-sector unions. Private-sector unions do not impose an added cost to society as a whole, but public-sector unions absolutely do, and do so directly as well as indirectly.

Private-sector unions differ most obviously from public-sector unions by the fact that they are constrained by market forces.  Wages cannot be so generous as to bring the total cost of production above where the market is willing to pay.  This leads us into the second, slightly less obvious difference:  Private-sector unions fight over gross margins' split between ownership and workers, essentially, wages vs. profit.  This is why Smith would likely support private-sector unions, because his sympathies lay with the workers and he absolutely abhorred profit because he saw it for exactly what it is, the product of uncompetitive markets and monopoly exploitation.

Public-sector unions, on the other hand, are not constrained by market forces and by their very nature pit a small, concentrated group (public employees) against society as a whole (tax payers).  Employees' gains come at tax payers' direct and zero-sum loss.  If society as a whole is the consumer of government, and if government employees are the producers of government, then a capitalist, Adam Smith philosophy would say it is absolutely counter productive to the wealth of the entire nation.  In addition to this direct cost, public-sector unions bear the indirect cost of corrupting the political process.  Maryland's Governor Martin O'Malley, for example, had an army of public-sector union members at his disposal for his campaign.  Some were threatened by AFSCME leaders.  The union helps get its candidate into power; the politician rewards its loyal army with bonuses, pay raises, and more paid days off even though the state is broke as a joke.

My private-sector union analysis makes the assumption that the market power of the union will not exceed the market power of the business. There are examples of the ill effects of when this happens; the UAW and the Big Three are the most famous.  Unions should never be bigger than any business being bargaining with.  The purpose of unions and collective bargaining is to match market power and squeeze profits, not exceed market power and put a company out of business and possibly squeeze resources from society as a whole.

Fractional reserve vs. full reserve banking tie-in to unions:  A full reserve banking system would have less lending/borrowing and more stock issuance/ownership than a fractional reserve system would have.  More workers would become owners, and productivity gains would be passed through to workers if not in wages, then in dividends and appreciation.

Even FDR saw that unions were unfit for the public sector:  

All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service.... The very nature and purposes of Government make it impossible.... The employer is the whole people.
-- FDR's letter to the president of the National Federation of Federal Employees in 1937.

-- Also at my Seeking Alpha blog --

February 10, 2011

Why is unemployment too damn high?

After watching 3 Ph.D. economists (Thomas DiLorenzo, Richard Vedder, and Josh Bivens) bumble through the question “Why is unemployment so high,” it is apparent that those who should know the answer to this question don’t. Before I answer the question, let's define and correct some fundamental errors that 2 hours of wrestling in Ron Paul’s new subcommittee failed to address. Here are the fundamental points:

1. The core of our nation’s monetary policy problems is not the Fed. Rather, the core of the problem is fractional reserve banking which gives bankers undue control of and enrichment from the economy. If we are going to insist on engaging in the fraud against man which is fractional reserve banking, the Fed actually helps to mitigate the damage of that fraud and is “necessary” within that system. So is FDIC insurance, something that Vedder went on record as opposing.
2. Full employment is not the proper or real objective of economic policy; rather, the proper objective is full prosperity. Sound crazy? Would you like to maintain the same standard of living as you do now by working only 6 months of the year instead of 12? Such would be the natural result of productivity gains in a free market system. Full employment can be achieved in any number of prosperity destroying ways. Our hunter-gatherer ancestors were gainfully employed 'round the clock forging for food.
3. Money has three basic functions: (a) as a medium of exchange, (b) as a unit of account, and (c) as a store of value. Pro-inflation monetary policy kicks out the 3rd leg of the stool and leads to all kinds of unintended consequences related to price distortions and price signaling, which leads into …
4. Inflation doesn’t merely alter the general price level; it also (and most importantly) alters the relative price level. If a 2% inflation rate were merely to multiply every single item in the economy by exactly 1.02, it wouldn’t make a difference at all. However, it makes a difference and regressively taxes lower and middle incomes because things like food and fuel increase by 20-50%, while wages stagnate, and the price of a new TV falls 29% due to hedonic adjustments.

Now, to answer the question:
“Why is unemployment so high?”

The short answer: Real incomes and the resulting total demand for goods and services have fallen. It happened as abruptly as it did because unsustainable credit allowed total demand for goods and services to exceed real incomes for the better part of the 2000s, and that credit quickly dried up when evidence started to show that these loans spelled financial ruin for their lenders.

More on fundamental point #4: During expansionary “boom” cycles, prices and wages both increase, but they do not increase at the same rate. Prices outrun wages. (See "The Relationship Between Wage Rates and Unemployment," by Emmett H. Welch, published in the Journal of the American Statistical Association, Vol. 28, No. 181, Supplement: Proceedings of the American Statistical Association (Mar., 1933), pp. 54-58.) In extreme and infrequent cases, such as the Great Depression or our current malaise, this price/wage gap is quite high; consider how many times median annual earnings it took to buy a median house in most of the US by 2007. Just as the average worker couldn’t afford to buy his own manufacturing output toward the end of the Roaring Twenties, by 2007 the average worker couldn’t buy a house in most of the country without lying about his income.

What is the correction to this expansion of unsustainable prices? Deflation. Yes, deflation would be the correction. While wages do fall during deflation, prices fall faster so that real wages increase. Of course, as Bevins pointed out, this raises the real cost of debt. If you have a $150k mortgage and your wages fall by 20%, your mortgage just got a lot more burdensome. However, Bivens errors by not considering the escape route of default. The US did away with debtors' prisons over 150 years ago. When loans default, it is the lender who loses the most. Prices must fall to levels that incomes can afford if we are to get out of this mess. Policy designed to prevent this natural cure from running its course prevents the economy from really recovering and is merely protectionism for banks under the guise of economic relief.

Bivens finished his list of errors by demonstrating a clear misunderstanding of Keynesian economics (his bread and butter) by conflating a change in the real money supply with a change in the nominal money supply.

Other factors contributing to high unemployment:

• Anti-competitive regulation, mostly at the state and local level
• Bold-faced monopoly-making through abusive intellectual property law
• Regressive taxation through the payroll tax that chokes the income of the middle class
• The chaining of health insurance to one’s employer, which encourages longer work weeks and discourages part time employment

While these 4 contributing items did not acutely precipitate our current malaise (that distinction belongs to credit collapse), their existence certainly is not helping any recovery.

-- Also at Seeking Alpha --

February 3, 2011

Pharmaceutical industry bailout

Still doubting the dirty relationship between government and big pharma?  The Obama administration settles these doubts with the creation of the National Center for Advancing Translational Sciences, a billion-dollar government-funded center to help create pharmaceutical drugs and then turn the research over for big pharma to collect the profits.  (Source: NYTimes, Jan. 22, 2011.)

The drug industry’s research productivity has been declining for 15 years, "and it certainly doesn’t show any signs of turning upward,” said Dr. Francis S. Collins, director of the NIH.  This is no surprise, as drug companies have typically spent twice as much on marketing as on research.  What is shocking is the "solution": The government now will not only conduct the basic research for drugs, as has increasingly been the case through NIH and other academic funding, but has created a new center devoted to developing pharmaceutical products to simply hand over to private Big Pharma to market and profit from.  “None of this is intended to be competitive with the private sector,” Dr. Collins said. “The hope would be that any project that reaches the point of commercial appeal would be moved out of the academic support line and into the private sector."

If pharmaceutical companies are not going to invest the research to invent the drugs, then there is absolutely no market-focused or consumer-focused argument to be made for granting the pharmaceutical companies monopoly protections on these drugs.  Treat them for what they are (manufacturing and distribution centers) and allow free competition to drive down prices.

Additionally, there is an income effect similar to stadium subsidies.  If government subsidies alleviate a business from spending its revenue stream on its core mission, in this case developing drugs, then there is more revenue leftover to pour into supernormal profits and executive salaries, especially under the anti-competitive protections of monopoly patents.  You can draw a direct link from government funding to CEO pay and profit margins.

Welcome to the new sort of bailout -- government-funded handouts for an industry that

• Spends less on R&D than goes into profits.
• Spends $11 billion annually on advertising and marketing.
• Makes $26.2 billion annually in profits.
• Has a profit margin of 28.7 percent, nearly three times higher than the profit margin of other manufacturers of branded consumer goods.
• Ranks #1 in profits among all industries on all measures: return on revenues, assets, and equity.

-- Also at my Seeking Alpha blog --