The Skeptical Optimist

Huckabee would penalize savers; why is that "fair"?

Many of us baby boomers spent decades saving a little extra for our golden years.  "Save your money; this is the only chance you'll have to put away a little extra for your retirement years," my dad always told me.  So I did just that: after the government took its cut from my income, I socked away a small, planned percentage of what was left over—and after several decades, it added up to a comfortable sum, just as my dad said it would. 

But now the government-according-to-Huckabee wants another cut.  With Huckabee's so-called Fair Tax, the federal government would take an additional 23% of it away from me as soon as I spent it. 

Why is that fair? 

Would someone please ask Mr. Huckabee that question soon?  Plenty of us baby boomers will be listening intently to his answer.  And, if he chooses not to answer, he will be speaking just as loudly to us. 

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End note:
This article in Friday's Washington Post mentioned the so-called Fair Tax, but not my main objection to it.

FQ.07.52: Favorite Quote for This Week

Continuing to run surpluses... brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private assets.
—Alan Greenspan, Jan. 25, 2001

Some global warming holiday cheer

After catching up on a few podcasts last week, I plan to spend a portion of the next few days exploring in more detail some relative good news I discovered about global warming. 

Russ Roberts recently interviewed an expert global warming ecologist and posted it on this web page, along with a few links to other interesting material on the same subject.  Here are a few excerpts that caught my attention.  The first is from Daniel Botkin's web page:

I’ve spent 39 years as a Ph. D. ecologist trying to understand nature, environment, life on the Earth. . . Having done research on global warming since 1968, I am surprised and impressed about how this has gone from a rather obscure and arcane subject to one that seems to be at the forefront of public, media, and political concerns, both nationally and internationally. My concern is that we may be moving from an irrational lack of care about global warming to an equally irrational panic about it, so that we make decisions quickly out of fear rather than based on clear thinking and scientific fundamentals.

The second excerpt is from Botkin's recent Op Ed in the Wall Street Journal, titled "Global Warming Delusions":

I'm not a naysayer. I'm a scientist who believes in the scientific method and in what facts tell us. I have worked for 40 years to try to improve our environment and improve human life as well. I believe we can do this only from a basis in reality, and that is not what I see happening now. Instead, like fashions that took hold in the past and are eloquently analyzed in the classic 19th century book "Extraordinary Popular Delusions and the Madness of Crowds," the popular imagination today appears to have been captured by beliefs that have little scientific basis.

Some colleagues who share some of my doubts argue that the only way to get our society to change is to frighten people with the possibility of a catastrophe, and that therefore it is all right and even necessary for scientists to exaggerate. They tell me that my belief in open and honest assessment is naïve. "Wolves deceive their prey, don't they?" one said to me recently. Therefore, biologically, he said, we are justified in exaggerating to get society to change.

I'm still unsure about the magnitude of the global warming phenomenon, but material like this helps.  This should make the week between the holidays even cheerier than I'd planned. 

Happy holidays to all. 

FQ.07.50: Favorite Quote for This Week

We should tax the private sector sufficiently to free the resources that we find desirable for the government to command, but no more than that.  This is likely to entail a stable debt/GDP ratio in a growing economy.
—Robert Eisner, The Misunderstood Economy

GDP growth, 2007 Q3 final

There's good news and bad news: Third quarter GDP was revised upwards again, largely due to exports.  That's the good news, and here's the usual chart.

The bad news: According to pessimist Nouriel Roubini, unmitigated disaster is just around the corner.  He differs from the typical doomsters, who have said repeatedly—since I started listening forty years ago—that financial collapse and chaos were ten years away (...which gave us plenty of time to run to the bookstore to get their how-to-survive-it book).  But Roubini keeps saying it will arrive with the next quarter's GDP report.  Will he be right this time?

Here's a transcript of Roubini's appearance on Larry Kudlow's show yesterday.  (As usual, Kudlow took the optimistic stance, but made sure the viewpoint of the "perma-bears" was respectfully represented within his guest list.) 

So, I'm looking forward to the January GDP report (for Q4 '07).  Brian Wesbury says Q4 should come in around 2.0% real growth; Roubini says 0.0% or less.  It depends largely on how much the housing sector problems have carried over into the rest of the economy. 

But how will you pay for it?

"How will you pay for it?"  That's a tough question for anyone on the receiving end.  It's a good bet we'll hear it from one side or the other on any given talk show featuring any politician talking about fiscal matters, especially within 18 months of a national election.  Democrats use it on Republicans when the subject is a tax cut (such as eliminating the Alternative Minimum Tax, or AMT), and Republicans use it on Democrats when the subject is a social spending increase. 

The person on the receiving end of that snappy question typically stutters like Porky Pig for a while, until the talk show host runs out of time and has to cut to a commercial.  It's a great "gotcha" question.  But there's a subtle fallacy embedded in it: the false premise that everything the government buys must be paid for right now with tax receipts or spending cuts, or else we shouldn't do it. 

It's a bad idea, but one that's easy to accept—because so many others of us are accepting the idea without objection ("social proof").  It's like the big crowd in New York City that was staring up at the sky—because they'd come upon other people standing there, staring up at the sky.  (The small original core of sky-gawkers had been recruited by a psychologist to do just that: stare at the sky for no reason.  The subsequent contagion of sky-gawking caused a traffic jam.  For more detail, see this Washington Post article, "Bad Ideas Can Be Contagious.")

If I were asked the snappy how-will-you-pay-for-it question on a program I supported, I'd respond as follows:

Well, how did we pay for the GI Bill?  We did it by educating and housing our returning GIs, who paid us back, and then some—starting a half-generation later.  It wasn't a pay-go program; we borrowed money from willing lenders to help fund it—but it subsequently paid for itself (and still is) via economic-growth-driven tax receipts.  You see, back then, some politicians were capable of thinking past the current budget year—a skill most of today's politicians seem to have forgotten. 

Let's illustrate further.  Here's the question in more specific terms using several situations from the past:

1. How did we "pay for" the Louisiana Purchase in 1803, without which we wouldn't be the United States of America today?

2. How did we "pay for" winning WW2, then rebuilding Europe?

3. How did we "pay for" the GI Bill, the last and arguably most successful New Deal program, still educating our GIs?

4. How did we "pay for" winning the Cold War, a victory that arguably prevented WW3? 

5. How did we "pay for" beefing up security at all of our overseas embassies, to prevent their destruction from terrorist attacks?

6. How did we "pay for" the necessary intelligence, diplomacy, and military capabilities to prevent the 9-11 attacks (and thereby the subsequent wars)? 

Here's the way I would answer those six how'd-we-pay-for-it questions:

1. We borrowed money from foreigners for the Louisiana Territory, and subsequently serviced that debt via generations of economic-growth-driven tax receipts.

2. We borrowed money from ourselves to win WW2 and rebuild Europe, and subsequently serviced the debt via generations of economic-growth-driven tax receipts.

3. We borrowed money from ourselves to send returning GIs to college, and subsequently serviced the debt via generations of economic-growth-driven tax receipts.

4. We borrowed money from ourselves and foreigners to prevent WW3, and subsequently serviced the debt via generations of economic-growth-driven tax receipts.

5. Uh, we didn't beef up all of them.  It's too bad that our embassies in Kenya and Tanzania were subsequently blown up by terrorist bombs, but at least we didn't have to borrow any money, or dent the surplus that so pleased both political parties. 

6. Uh, we didn't invest in the necessary intelligence, diplomacy, or military capabilities in the '90s; instead, we trimmed those costs down to a much smaller portion of the budget.  It's too bad 9-11 wasn't prevented, but at least we didn't have to borrow any money, or dent the surplus that so pleased both political parties. 

The point: Not everything needs to be "pay-go" because some things are good investments in the future—one of the best of those being war prevention (according to John Stuart Mill).  Good investments eventually (by definition) pay for themselves, and then some.  Borrowing money for good investments is sound financial practice; ask any banker.  Statesmen of the past who stuck by their convictions against the odds (Jefferson, FDR, Reagan) knew that in their hearts. 

Wouldn't it be a startling change to start hearing substantive debate about the future merits of tax or spend proposals, instead of the usual "How will you pay for it" zinger?  Wouldn't it be nice if fewer of us were just staring at the sky, accepting the pay-go malarkey without questioning it?

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End note about this blog's future:

In a few weeks, I'll be undertaking a sizable business-related project that will reduce the amount of non-business time I've had for the last three years for composing material here, answering all the emails, etc.  The new project will take a minimum of five months, and could stretch to two years. 

I will post as frequently as time permits, but I can guarantee the time available for this blog will be squeezed significantly.  Business was taking 1/3 of my time; it will soon become 2/3.  I'm targeting to post at least once a week here, but we'll see.  I'll do my best, so bear with me. 

FQ.07.49: Favorite Quote for This Week

Humans have strongly ingrained rules about fairness and reciprocity that override calculated "rationality." ... We have deep rooted behaviors that reward cooperation and punish free riders.  While some economists might view these behaviors as irrational, [they] in fact provide the cornerstone for the social cooperation that is essential for wealth creation.
—Eric Beinhocker, The Origin of Wealth

Why wait for the tax hike?

Many Americans think tax rates are too low (Warren Buffet included), and that the 2001/2003 tax rate reductions should be allowed to expire in 2010.  Although I disagree, I respect honest differences of opinion among mature adults—and I'm also a strong believer in freedom of choice. 

Coincidentally, as I was browsing around the US Treasury's website, I stumbled across some new information (for me, anyway).  Before I found this, I didn't know that the Treasury already has a way for those who think taxes are too low to remedy that situation, and set an example for everyone else.  I decided to share this important information so readers here can spread the word. 

I've noticed that those who favor tax rate increases tend to justify that opinion based on an objection to the deficit and the increasing national debt.  Well here's the good news: it's not necessary to wait for the federal government to force a tax hike on everyone; it's possible to take a grass-roots approach.  Here's what the US Treasury has to say (see this page at their website):

How do you make a contribution to reduce the debt?

Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to:

Attn Dept G
Bureau Of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188

The deficit isn't very large now, so it shouldn't take much of a grass-roots movement to completely eliminate it.  (As I said, I think my taxes are already high enough, but I'll be keeping my eye on the numbers to see if this movement catches on.) 

Deficit Watch thru Nov 2007

I have trouble sticking with the economic optimists when results like this come in.  Although the deficit is still harmless at 1.4% GDP, rolling 12-month corporate tax receipts are not growing any more; that's the second-largest component of federal tax receipts, and makes it look as if the pessimists have a point regarding the economic slowdown they've been predicting for months. 

Here's this month's chart; click to enlarge.

If these trends keep up for another three or four months, we can safely forget about getting a balanced budget in time to eliminate deficit dogma from the fall '08 campaign rhetoric.

Why the Fed will cut the target rate

With the Fed meeting approaching in a few hours, most are predicting they'll cut their target fed funds rate by a quarter point—so I thought it would be a good time to update the interest rate tracking chart.  Click to enlarge.

We haven't seen interest rates this low for more than two years, and short term rates have dropped sharply in recent weeks, suggesting a flight to safety.  The bond market participants don't appear to see higher inflation on the horizon; is it possible they see disinflation, or even deflation, instead? 

The highest rate on the chart today is fed funds, which exceeds even the 20-year T-bond.  It looks to me as if the market is telling the Fed it needs to cut, maybe by a full half-point.  Unanticipated deflation is arguably just as harmful as unanticipated inflation, so count me in favor of a half-point cut in the target rate, to fight off the recession so many are predicting (and seemingly hoping for).